May 2 2008 (Bloomberg) -- Berkshire Hathaway Inc. Chairman Warren Buffett, who has used dozens of acquisitions to beat every major U.S. stock index, is poised to extend his lead with more than $40 billion to spend as the credit crunch sidetracks other bidders.
With the U.S. on the brink of recession, investors expect Buffett to deploy Berkshire's cash to scoop up bargains. Berkshire rose 22 percent in New York trading in the past 12 months as the worst housing slump in a quarter century slowed the economy, led to record losses for banks and securities firms and caused the Standard & Poor's 500 Index to decline 6.8 percent. The shares gained at an annual rate of 19.5 percent during the past two decades, outpacing the S&P 500's 11 percent advance.
``Buffett has got the liquidity that others are lacking,'' said Mohnish Pabrai, founder of Irvine, California-based Pabrai Investment Funds, who manages $600 million and holds Berkshire shares. ``The disruptions work in his favor. This is a perfect market for Berkshire.''
The 77-year-old Buffett transformed Omaha, Nebraska-based Berkshire from a failing textile maker in the 1960s into a $200 billion company by taking insurance premiums and investing them in stocks and companies. He owns about 33 percent of Berkshire, making him the world's richest person ahead of Microsoft Corp. co-founder Bill Gates, Forbes magazine reported in March.
Berkshire probably will say later today that first-quarter earnings declined because of lower profits from underwriting insurance, according to two analysts who track the company. Berkshire relies on insurance units, including Geico Corp. and General Re Corp., for about half of its profit. Buffett holds his annual shareholders' meeting this weekend.
Trek to Omaha
About 27,000 investors from every continent except Antarctica are gathering in Omaha. They will pack the city's Qwest center to hear Buffett and Berkshire Vice Chairman Charles Munger, 84, answer questions and talk about their plans.
Companies that Buffett has been scooping up will add significantly to Berkshire's earnings, and aren't fully reflected in the share price, Pabrai said.
On the day Buffett won control of Berkshire Hathaway in 1965, the stock closed at $18 a share. Berkshire's Class A shares closed yesterday at $133,900 in New York Stock Exchange composite trading. Buffett has never split the shares.
Buffett spent $4.5 billion last month for a 60 percent stake in the Pritzker family's Marmon Holdings Inc. He committed $6.5 billion this week to help finance Mars Inc.'s takeover of Wm. Wrigley Jr., the world's biggest maker of chewing gum. The deal includes $2.1 billion for a minority holding in Chicago-based Wrigley that Berkshire will get at an unspecified discount.
Decline in M&A
``This is his market,'' Pabrai said. ``We saw it with Wrigley,'' when no private-equity firms or banks stepped up to compete with Berkshire, he said.
The global value of announced mergers and acquisitions fell 36 percent so far in 2008 to $943.5 billion from a year earlier, according to data compiled by Bloomberg.
Wrigley and Marmon are controlled by their founding families, and that's a trait Buffett will seek when he goes hunting for acquisitions during a four-city tour of Europe. He starts May 19.
At the center of Buffett's European efforts is Angelo Moratti, scion of the founding family of Italian energy company Saras SpA. Moratti is organizing visits to Milan and Madrid. For the past seven years, Moratti traveled to Omaha at least four times a year to brief Buffett on companies and issues in Europe.
``Mr. Buffett's practices, which are based on trust of the human being and deep understanding of the business, are really not understood in Europe at this point,'' Moratti said. ``You tell a European entrepreneur that there is a man in Omaha that buys an Israeli company, and he buys the company without even going to see the company, and the European will say `this can't be right.'''
Moratti is referring to the 2006 acquisition of Iscar Metalworking Cos., Buffett's first outside the U.S.
``It took me a long time as a non-American to find out what Warren Buffett and Berkshire do differently for family businesses,'' said Eitan Wertheimer, whose family sold Iscar to Berkshire. Wertheimer is now helping organize Buffett's trip to Frankfurt, Lausanne, Madrid and Milan.
Buffett has said in recent years that investments meeting his criteria and big enough to make a difference to Berkshire have become scarce, prompting him to look abroad. He said at last year's annual meeting that he would welcome a $40 billion to $60 billion deal. Buffett also has said he expects the dollar to depreciate, making earnings in other currencies more important.
Berkshire may find candidates in Germany, said Hermann Simon, founder of Bonn-based management consulting firm Simon, Kucher & Partners.
Simon studied 1,300 mid-size and smaller companies in Germany, Switzerland and Austria from 1995 to 2005 for his 2007 book ``Hidden Champions of the 21st Century, Success Strategies of Unknown World Market Leaders.'' All were top-three in the world for their business.
The mostly private enterprises have many of the characteristics Buffett prizes, Simon said. They tend to have proprietary products and processes, long-tenured management, growing market share and consistent returns on equity above 40 percent. Simon declined to name specific companies that might interest Buffett.
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