The Atlanta Journal-Constitution
BUFFETT’S $100B PROBLEM: FINDING SOMETHING BIG TO BUY
Investor’s issue is in finding something big to buy.
Warren Buffett celebrated his 87th birthday recently, but the bigger number in his life is the $100 billion mound of cash that his Berkshire Hathaway has stockpiled.
Buffett created his cash-gushing conglomerate out of an ailing textile firm that he took over more than 50 years ago. Berkshire Hathaway now has dozens of subsidiaries, from rail- roads to utilities to candy companies. It has 367,000 employees, $24 billion in annual profit and market capitalization approaching $500 billion.
Simply put, it’s one of the most profitable enterprises ever created.
Insurance has been a big part of Berkshire Hathaway’s runaway success, with Buf- fett smartly using the premiums people pay — known as “float” — to invest in privately and publicly owned companies. He is able to put the cash to work because most insurance claims are paid out years later.
The conundrum Buffett faces is an enviable one:
W hat to do with all the money? In this case, $100 billion. The Sage of Omaha acknowledged the difficul- ties of deploying his cash during Berkshire’s annual meeting in May.
“The question is, ‘Are we going to be able to deploy it?’ ” he told the thousands the pilbig of grimagetorit meaningfullytomsize failed power-transmissionfor pra takesBy Last faithfulmust$9 of Energyline necessity,to billion Berkshiremonth,a buyto huntof big who Omaha.a outbid Oncor, acquisitionmove companyin for madehe cash. Hathaway.the triedthe a Buffettinves- game;Texas firm,Sem- bot-the to and investor, is by bly taking companiesThe $450 aversethis ever million. summerto such bigger technology,whoas Apple. stakes investednota-He in is also a in troubledHome lender. Capital Canadian Group, mortgage ana- lyst Jonathanand partner Brandt, withan the Cunniff investment firm of Ruane, & Goldfarb, is an expertway. He on has Berkshireto be. BerkshireHatha-
Hathaway is the investment firm’s largest holding. Brandt attends the Berkshire Hatha- way annual meeting, where he sits on a panel of journalists and financial analysts who pepper Buffett and Vice
Chairman Charlie Munger with questions.
I spent a couple of hours interviewing Brandt and
other principals at Ruane, Cunniff chief executive& Goldfarb, David includingPoppe
and analyst One of John ongoingB. Harris. questhe tions surrounding Berkshire Hathaway is that it doesn’t pay a dividend and doesn’t buy back its stock, two things that it could do to absorb some of that $100 billion. Buffett has resisted paying a dividend, thinking that he can put the cash to more productive use through acquisitions. That’s one of the places where we diverted the discussion. “There’s a lot of focus on whether or not Berkshire is going to pay a dividend,” Brandt said. “I would be mildly surprised if it did start paying a dividend within the next three years. Maybe the most important aspect of that is it might indicate that [Buffett] doesn’t think he can deploy the capital at a more attractive rate than the shareholders could with the distributed cash.” chases [Berkshire’sgrowing“Oneshire “But larger,”of or either dividendslarger cashup reasons Brandtsharein and pile] the will repur- largerBerk- said. frommar- keep and the moves ket dend.is that cap It it rankingsdoesn’t doesn’t repurchaseeverypay a year divishares.to do with That doesn’tthe returnshave why are good. But it just piles up more and more money.” Poppe implied thatBuffett still has his investor mojo. “He remains quite confi- dent that he will find things to buy over time, even with the limitations of size,” he said. “He is very patient. Markets from time to time will give opportunities, and he is willing to wait for that opportunity.” But as the cash accumulates and the size of Berk- shire Hathaway expands, the pool of companies that can add significant value dwindles. “I just think it’s harder to find investments,” Brandt said. “If he is buying stocks, he can only look at market caps. Let’s say he wanted or assumes he can go up to 10 percent of a company without running into possible [regulatory] issues.” “If he wants to put $5 billion into something, it has to be a $50 billion market cap.I don’t know how many companies there are at $50 billion or above or $100 billion or above, but he has a limited set of opportunities for stocks and also for businesses he can buy,” Brandt said. “He does buy companies that are worth less than a billion, but it doesn’t really move the needle. To do something like Precision Castpar ts or Burling ton
Northern Santa Fe Corporation, that’s a $35 billion to $40 billion acquisition. And it’s just hard to get a really good, cheap multiple on something that big.”