Warren Buffett opens door to bigger acquisitions

Warren Buffett's devoted followers made their pilgrimage to Omaha this year amid an intense debate about whether his $300 billion conglomerate Berkshire Hathaway should hand back cash to shareholders, or even one day be broken up.

Quite the opposite, an unusually defiant Mr Buffett told them. In fact, the company might make bigger acquisitions than anyone had contemplated.

Among the surprises during the five-hour question-and-answer session that Mr Buffett and vice-chairman Charlie Munger submit to annually was the suggestion Berkshire could consider an acquisition as big as $50 billion, almost twice what Wall Street's analysts thought was possible.

The size of the ambition is important because, as Mr Buffett has warned many times over the years, Berkshire’s scale makes it harder to find investments that can generate a reaction.

Its businesses range from insurance to railroads to power companies, plus a ragbag of retailers, industrial companies and newspapers, topped up with minority stakes in brand names such as Coca-Cola and American Express.

Growth lagged target
Berkshire's market value touched a record $319 billion last week, but its book value growth has lagged the S&P 500 over five years, missing the target that Mr Buffett sets for himself for the first time.

A call by The Economist magazine for Mr Buffett to order his successor to break the company up had set the shareholders a-chatter ahead of the meeting, which took place with an estimated 38,000 in attendance at a concert arena in downtown Omaha on Saturday. There was also a shareholder proposal on the ballot that Berkshire should begin paying a dividend out of a cash pile that had risen to $49 billion at the end of March.

Mr Buffett has always promised to keep $20 billion on hand as a cushion, but he surprised analysts by saying Berkshire could sell some of its stock and bond portfolio and take on leverage if it needed to. “If we see a really good $50 billion deal, we’ll figure out a way to do it.”

The question for investors is whether Mr Buffett, or his successors, will be tempted to drop their discipline when it comes to acquisitions. He opened the door, additionally, to doing more deals in partnership with 3G, a private equity company with which he bought the foodmaker Heinz last year.

Berkshire, which has traditionally given the chief executives of its subsidiaries wide latitude, has a 50 per cent stake; it is 3G’s managers who are conducting a restructuring that has led to over 3,000 job losses.

Asked directly about the idea of breaking up Berkshire, he said the company had the advantage of being able to take profits from slow-growth businesses and allocate them to subsidiaries that can grow faster, something smaller companies have less options for doing.

Worth more
"Berkshire is worth more as presently constituted than in any other form I can conceive of unless we engage in something to de-tax the whole place . . .

“There is no advantage to breaking Berkshire into pieces. It would be a terrible mistake.”

Jay Gelb of Barclays, who was one of the three financial analysts posing questions to Messrs Buffett and Munger, said Mr Buffett had presented a compelling case to be left on his present course. – Copyright The Financial Times Ltd 2014