He’s making a list and checking it twice, but can’t find a takeover target that’s nice.
Warren Buffett is the jolly man of the stock market. However, the chairman and CEO of Berkshire Hathaway Inc. has also been a bit of a Scrooge this year, as he continues to pass up acquisitions and instead hoard his money. The billionaire has long been seeking a really big deal on which to spend some of his company’s US$128 billion of cash, except everything is overpriced in his view. To make matters more frustrating, Berkshire’s own shares are lagging behind the broader U.S. market by the most since 2009.
While 2019 wasn’t Buffett’s worst year, it was surely one of his dullest. With Berkshire’s cash pile reaching new heights, Buffett has said that just the thought of taking over another company — he’s acquired nearly 200 during his career — causes his heart “to beat faster.” Instead, this chart of Berkshire’s stock performance looks like it’s almost flat-lining:
Berkshire shares are on track to end the year up a modest 11 per cent, trailing the S&P 500 index by 20 percentage points. That’s even as the company posted record operating profit in the latest quarter.
Buffett, who turned 89 in August, is the fourth-richest person in the world, and it’s hard for the fourth-richest person in the world to have too bad of a year. But for one of the most celebrated investors and dealmakers of all time, who also enjoys basking in the spotlight, the deal dry spell isn’t much fun. Without any new acquisitions to rave about, even Buffett’s highly anticipated annual letters — the release of which investors treat like tickets dropping for a Beyonce concert — lately have been shorter than usual and have lacked his characteristic bawdy metaphors. (That’s not to say a retreat from the dirty-grandpa humour isn’t welcomed by this writer.)
Berkshire’s last large takeover — the kind he dubs “elephants” — was Precision Castparts, an aerospace-parts supplier, for US$37 billion; it was completed nearly four years ago. This year, Berkshire merely provided US$10 billion of high-interest financing to help another company, Occidental Petroleum Corp., make an acquisition; that barely put a dent in Berkshire’s cash. It was then outbid in November for software distributor Tech Data Corp. in what would have been a US$5 billion deal.(1) Berkshire had considered selling debt in Europe, which might have been a precursor to a significant acquisition overseas, but that never panned out. At the end of the day, the company’s splashiest investment of the year was an US$861 million stake in Amazon.com Inc. The closest thing Buffett found to an elephant might just be this stuffed animal, an item sold at RH, a small home-furnishings retailer in which Berkshire recently bought a stake.
Though it was a boring year, 2019 marks the end of what was perhaps Berkshire’s most transformative decade. It became the owner of one of America’s most expansive railroad systems, BNSF, while recognizable brands including Duracell and Kraft Heinz (for better or worse) also joined the Berkshire family. At the start of the decade, consumer stocks such as Coca-Cola Co. and Procter & Gamble Co. accounted for the biggest share of Berkshire’s stock-market holdings. Now, Apple Inc. and some banks and credit-card companies together comprise almost three-quarters of its portfolio. Buffett also took meaningful steps toward succession planning by promoting Greg Abel and Ajit Jain to oversee all Berkshire’s operations and thus raising their public profiles.
Buffett and Berkshire Vice Chairman Charlie Munger — who turns 96 on New Year’s Day — were asked during the last shareholder meeting in May whether their successors will have to transition the company from an acquisition-and-investment vehicle into an entity focused instead on returning capital through stock buybacks and dividends. “That’s certainly a possibility,” maybe even during his time, Buffett said. “But we will have to see how that works out over many years, because certain years huge opportunities present themselves and other years are totally dry holes.” Berkshire spent about US$2.8 billion repurchasing class A and B shares in the first nine months of 2019, up from US$0 in 2017.
U.S. stocks haven’t been getting any cheaper for Buffett. That said, some see his hoarding of cash partly as an insurance policy in case his health deteriorates, so that there’s added financial flexibility for the next CEO. But knowing Buffett, he’ll want to go out with a bang. Finding one last elephant should be his New Year’s resolution.
(1) Buffett was also close to doing a “very large” transaction around this time last year, but it fell apart, as did attempted deals involving Unilever Plc and Oncor Electric Delivery Co. in 2017.