Berk­shire Hath­away buy­ing Pre­ci­sion Cast­parts


War­ren Buf­fett’s big­gest ac­qui­si­tion yet — a US$32.36 bil­lion buy­out of Pre­ci­sion Cast­parts — will fur­ther change the com­plex­ion of Berk­shire Hath­away and in­crease the con­glom­er­ate’s re­liance on in­dus­trial com­pa­nies.

The deal an­nounced Mon­day to ac­quire the aerospace and in­dus­trial com­pany adds to a string of man­u­fac­tur­ing ac­qui­si­tions Berk­shire com­pleted in re­cent years out­side of the in­sur­ance in­dus­try that fu­eled its growth. The Omaha-based con­glom­er­ate al­ready owned an eclec­tic mix of more than 80 sub­sidiaries.

With a com­pany that size, Buf­fett needs to strike big deals to mean­ing­fully im­prove prof­its at Berk­shire. As of June 30, the com­pany had US$66.6 bil­lion in cash on hand. The uni­verse of big com­pa­nies that fit Buf­fett’s cri­te­ria tend to be man­u­fac­tur­ing or in­dus­trial firms.

And the 84- year- old Buf­fett wants to give Berk­shire the strong­est foun­da­tion pos­si­ble for his in­vestors and who­ever even­tu­ally suc­ceeds him.

“I think he’s set­ting things up for the fu­ture and he doesn’t want any­thing ter­ri­bly risky,” said Andy Kil­patrick, the in­vestor who wrote “Of Per­ma­nent Value: The Story of War­ren Buf­fett.”

Pre­ci­sion Cast­parts, based in Port­land, Ore­gon, makes com­po­nents for air­craft, power plants and other in­dus­trial uses. It has been hit hard by tum­bling crude and nat­u­ral gas prices, but it ap­pears to have strong long-term prospects. Buf­fet told CNBC that he would have bought the com­pany even if he knew that com­modi­ties were in the midst of a mul­ti­year slump.

“We’re go­ing to be in this busi­ness for 100 years, so it doesn’t re­ally make any dif­fer­ence what oil and gas does in the next year,” said Buf­fett, whose com­pany al­ready held 4.2 mil­lion shares, or about 3 per­cent, of Pre­ci­sion Cast­parts’ stock.

‘Buf­fett’s pos­si­ble in­vest­ments


Ge­orge Mor­gan, a fi­nance pro­fes­sor at the Univer­sity of Ne­braska at Omaha and a for­mer in­vest­ment ad­viser, said Buf­fett’s field of pos­si­ble in­vest­ments is lim­ited be­cause of the size he is look­ing for to­day.

“His se­lec­tion field is ex­tremely lim­ited,” Mor­gan said.

Berk­shire’s core in­sur­ance com­pa­nies in­clude Ge­ico and Gen­eral Rein­sur­ance. It also owns BNSF rail­road, sev­eral ma­jor util­i­ties, cloth­ing, fur­ni­ture, brick, car­pet, jew­elry and pi­lot train­ing firms. It also has ma­jor in­vest­ments in such com­pa­nies as Co­caCola, IBM and Wells Fargo & Co.

In Berk­shire’s sec­ond quar­ter, the com­pany gen­er­ated roughly three-quar­ters of its US$4 bil­lion net in­come from non-in­sur­ance com­pa­nies. It was an es­pe­cially weak quar­ter for Berk­shire’s in­sur­ance units but it il­lus­trates the con­glom­er­ate’s in­creas­ing re­liance on man­u­fac­tur­ing, util­i­ties and the rail­road.

Berk­shire agreed to pay US$235 per share in cash for Pre­ci­sion Cast­parts’ out­stand­ing stock. In­clud­ing debt, the deal is val­ued at about US$37.2 bil­lion.

Au­thor and in­vestor Jeff Matthews, who wrote “War­ren Buf­fett’s Suc­ces­sor: Who It Is and Why It Mat­ters,” said this deal con­tin­ues the evo­lu­tion of Berk­shire, but he doesn’t think Buf­fett is get­ting a good price on Pre­ci­sion Cast­parts.

“I’m not crazy about buy­ing a cycli­cal busi­ness like this with the stock mar­ket at an all-time high,” said Matthews, who also holds Berk­shire stock.

But other an­a­lysts said the price ap­peared fair.

KBW an­a­lyst Meyer Shields said Pre­ci­sion Cast­parts Corp. may be a cycli­cal busi­ness, but the com­pli­cated prod­ucts it makes are hard for a com­peti­tor to match. Shields said Pre­ci­sion Cast­parts stock had traded as high as US$280 in re­cent years.

“From the Berk­shire per­spec­tive, they’re get­ting a good com­pany on sale,” Shields said.

Pre­ci­sion Cast­parts will keep its name and will re­main in Port­land.

The boards of Pre­ci­sion Cast­parts and Berk­shire Hath­away Inc. unan­i­mously ap­proved the trans­ac­tion, which is ex­pected to close in the first quar­ter of next year.

Shares of Pre­ci­sion Cast­parts surged 19 per­cent, or US$37.04, to close at US$230.92.


In this May 5, 2014 file photo, Berk­shire Hath­away Chair­man and CEO War­ren Buf­fett speaks dur­ing an in­ter­view with Liz Cla­man on the Fox Busi­ness Net­work in Omaha, Ne­braska.

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