August 8, 2008, 2:09 pm
There has hardly been a major deal done this year that didn’t have Warren Buffett’s fingerprints on it. The Oracle of Omaha jumped in to finance Mars’ acquisition of Wrigley and Dow Chemical’s acquisition of Rohm & Haas. He bought Marmon Holdings, offered to reinsure $800 million of bonds held by struggling bond insurers including MBIA and Ambac Financial.
So what is going on? Does Buffett have attention deficit disorder?
Quite the opposite. Buffett may be more focused than ever. He has done enough big deals this year to show a trend in which he is shaking up his investing style to shock some growth into Berkshire Hathaway.
A shakeup is necessary. Berkshire Hathaway, a shameless engine of growth for decades, has hit a big hurdle this year and is facing its third straight quarterly drop in profits. In early July, Berkshire saw its worst first half since 1990 and was expected to post a 32% decline today. Buffett told investors that they would be mistaken to believe that the future growth of Berkshire will be as big as the growth in the past.
That’s partly why Buffett is slowly and steadily moving away from his focus on small deals and industrial companies to bigger companies. He’s standing by his old stalwarts — the consumer and retail sectors that gave him big hits with Coca-Cola. But he’s also expanding quickly in the financial sector with Berkshire Hathaway’s new bond insurer.
He has also opened something Deal Journal likes to call the Bank of Buffett, running in to finance deals in a troubled market where traditional lenders are shying away. His offer to finance the Wrigley deal with $4.4 billion in subordinated debt was far more sizable than the usual small deals Buffett has racked up in the past. And Buffett pitched in $3 billion for the Dow Chemical deal.
Last year, for instance, he racked up many small deals including paying for a 10.9% stake in railroad Burlington Northern Santa Fe, an acquisition of a small luxury company, Bel-Oro International, and the acquisition of a small technology distributor, TTI, that had less than $900 million in revenues. Only at the end of the year did he decide to splash out $4.5 billion on Marmon Holdings.
So can Buffett’s aggressive expansion work? He does have acquisitions down to a science, and his requirements for deals are sensible advice for any acquirer: in his words, “a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.” He also looks for low-cost producers like Costco and worldwide brands like Coca-Cola and Gillette. History shows that he does well when he steps outside the box. In 2006, for instance, he bought into Israel metal-cutter Iscar Holdings for $4 billion. This May, he noted that Iscar was growing into China and called the deal “a dream acquisition” because it had exceeded his expectations.
But, no matter how successful Buffett’s new strategy is, the floodwaters rise ever higher from the credit crunch. The pressure on his portfolio is immense. His investments in American Express and Wells Fargo have suffered with the rest of the financial sector, and he expects the profit margins on his insurance holdings to keep falling. All of his housing-related holdings — brick, carpet and real estate brokerages — also suffered this year.
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