Berkshire to buy Precision Castparts for $37 billion

Warren Buffett's Berkshire Hathaway Inc. agreed to buy Precision Castparts Corp., the maker of equipment for the aerospace and energy industries, in a deal valued at $37.2 billion.

Buffett's firm will pay $235 a share in cash, and take on Precision Castparts' net debt, the companies said Monday in a statement. That's 21 percent more than Friday's closing price for the Portland, Oregon-based company, which had dropped 17 percent in 12 months amid the slump in energy prices.

The deal is one of the largest by Buffett, who has been building his Omaha, Nebraska-based firm in recent years with the acquisition of industrial companies such as Iscar Metalworking in 2006 and chemical maker Lubrizol in 2011. It will also help work down a cash pile that climbed to more than $66 billion at Berkshire as of June 30.

"I've admired PCC's operation for a long time," Buffett said in the statement. "It is the supplier of choice for the world's aerospace industry, one of the largest sources of American exports."

The target company uses advanced engineering technology to make metal industrial components for jet engines and power plants as well as pipes for the oil and gas industry. It employs about 30,000 people and produced $2.6 billion of pretax operating income on $10 billion of revenue in its last fiscal year.

Precision Castparts said in July that it expects $10 billion to $10.4 billion of sales and an operating margin of about 27 percent in its current fiscal year, which ends in March. Last year, 70 percent of its sales were made to the aerospace industry, with another 17 percent going to the energy market. The company's customers include General Electric Co., Boeing Co. and Airbus Group SE.

In 2010, Buffett spent $26.5 billion in cash and stock for the portion of Burlington Northern Santa Fe that Berkshire didn't already own, valuing the railroad at about $34 billion. Berkshire also agreed to take on about $10 billion of BNSF debt.

Buffett doesn't pay a dividend and rarely repurchases shares, meaning he may have to pursue more megadeals, said Meyer Shields, an analyst at Keefe Bruyette & Woods.

"This is going to be a recurring phenomenon where the businesses in the aggregate are spinning off so much cash that you can go out and buy another business," Shields said before Monday's deal was announced.

Meanwhile, Warren Buffett's eventual successor at Berkshire Hathaway Inc. will have one more industrial company to supervise, and a lot less cash to worry about, if the billionaire pulls off a deal for Precision Castparts Corp.

That's the sort of trade-off that the 84-year-old may be looking for as he prepares his company for a new generation of leadership and seeks to shrink a cash pile that stood at $66.6 billion on June 30. Berkshire is in talks to buy Precision Castparts, which had a market value of more than $26 billion at Friday's close, according to a person familiar with the matter.

For the successor, a smaller cash hoard "certainly would give him or her time to focus on integrating and improving the operations of existing portfolio companies, without any pressure to make acquisitions any time soon," Jim Shanahan, an analyst at Edward Jones, said in a phone interview. "Berkshire generates a lot of capital and they have a hard time finding opportunities to put it to work."

Adding Precision Castparts and its 30,000 workers would continue Buffett's transformation of Berkshire to an industrial conglomerate with less reliance on reinsurance and stock picking. That also means his successor will need to be adept at buying and managing large companies.

Buffett has said Berkshire has a candidate ready to replace him as chief executive officer if needed, though he's never publicly identified the person. Vice Chairman Charles Munger has dubbed two managers, energy chief Greg Abel and Ajit Jain, the head of Berkshire's namesake reinsurance operation, as "world-leading" executives, stoking speculation that one of the two could take over.