Buffett preaches patience in making acquisitions
SEATTLE Warren Buffett has a message for investors wondering when he’ll strike his next big deal: Be patient.
After a year in which he was largely frustrated on the acquisition front and saw cash pile up at his conglomerate, Berkshire Hathaway Inc., he used his annual letter to shareholders to comment on the “all-time high” cost of buying businesses and how the “ample availability” of cheap debt has fuelled unwise deals. Berkshire, Buffett wrote, will still occasionally get opportunities to make large purchases at sensible prices.
“In the meantime, we will stick with our simple guideline,” he said. “The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
It was a note of caution that may reverberate as investors weigh whether the bull market will resume after this month’s sell-off. While Buffett, 87, reiterated his view that equity investors in America will do well over the long haul, he also advised against buying stocks with borrowed money and highlighted how even his own company has seen its shares swoon on a few occasions over the past five decades.
The letter included “more than a subtle warning that prices, on many fronts, are high,” said David Rolfe, chief investment officer at Wedgewood Partners, a money manager that oversees US$4.5 billion, including Berkshire shares. “Take heed.”
While mergers and acquisitions slowed globally last year, deal prices have been climbing and there are signs 2018 is getting off to a faster start. Acquirers paid a median of about 12 times earnings before interest, taxes, depreciation and amortization in 2017, up from a multiple of 8.9 in 2013, according to data compiled by Bloomberg.
Few CEOs have as extensive a track record of buying businesses as Buffett. Since he took control of Berkshire in 1965, his patient stream of acquisitions has transformed the company from a struggling textile maker into a conglomerate now valued at about a half trillion dollars. Its subsidiaries include electric utilities, BNSF Railway, auto insurer Geico, Dairy Queen, Duracell and dozens of other enterprises.
Operating earnings from those businesses slumped 18 per cent last year to US$14.5 billion after the company’s insurance operations posted their first underwriting loss since 2002. But book value per share, a gauge of Berkshire’s net worth, climbed 23 per cent last year, in big part because of changes to U.S. tax law.