Warren Buffett is still interested in “shooting elephants” but is not interested in issuing Berkshire Hathaway shares to fund acquisitions. Last week, we described Berkshire’s plans to acquire Lubrizol as “bagging a zebra” but Mr. Buffett thinks it should be characterized as something between a zebra and an elephant. We hereby nominate the giraffe as the game animal of choice for Lubrizol. Regardless of the animal in question, it appears that Mr. Buffett has all but ruled out the use of Berkshire shares to fund new deals.
Use of shares is not likely to be required barring a very large acquisition. Despite Berkshire’s plans to acquire Lubrizol, the company faces the problem of a growing cash pile due to ongoing cash flows from operations and repayment of the Goldman Sachs and Swiss Re investments made during the financial crisis. Although Berkshire is likely to face some liability due to the Japanese earthquake and tsunami, including an estimated $300 million due to its quota-share reinsurance agreement with Swiss Re, Berkshire should have ample funds for acquisitions even with its self-imposed minimum cash balance of $20 billion.
Although we would caution against over-interpreting Mr. Buffett’s comments on favoring the use of cash over Berkshire shares for acquisitions, he does seem to clearly indicate that using shares would result in giving up more intrinsic value than he would be getting for the “elephant sized” acquisitions he has in mind. This leads us to believe that Mr. Buffett views the current share price of Berkshire as undervalued relative to the market prices of other very large publicly traded companies plus the control premium that Berkshire would likely have to pay.
Mr. Buffett also comments on one acquisition target that he has in mind but is currently too large to consider. We will not speculate on the potential target other than to note that he must be referring to a company with a takeover price in excess of $20 to $30 billion. It is easy enough to peruse the list of American companies with market capitalization in excess of that figure and narrow the list down to targets that Mr. Buffett probably views to be within his circle of competence. However, it is also possible that foreign acquisitions may occur in the future which would broaden the list of potential targets.
Becky Quick’s brief interview with Mr. Buffett is embedded below. For RSS Feed subscribers, please click on this link for the video.
Disclosure: Long Berkshire Hathaway