Berkshire’s 2013 report hints at further growth

The challenge looming over Warren Buffett is whether Berkshire Hathaway, the vast business empire he has built over five decades, can continue to make the sort of large acquisitions that will help the company grow at a pace that will sustain Mr. Buffett’s reputation as the nation’s shrewdest investor.

But Mr. Buffett, in Berkshire’s annual report released Saturday, highlighted the large deals that his company made last year, including the acquisition of H.J. Heinz — and strongly hinted at how future big purchases might take place.

“With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size,” Mr. Buffett said.

Last year, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion. “NV Energy will not be MidAmerican’s last major acquisition,” he said.

Jeff Matthews, a hedge fund manager who has written books on Berkshire, said he detected a strong desire to do more acquisitions.

“I think it’s way more than a hint,” Mr. Matthews said in an email. “He clearly sees more deals at MidAmerican.”

Every year, Berkshire’s annual reports are devoured as avidly as top-selling novels. The main attraction is Mr. Buffett’s letter to shareholders, in which he often extols America as a breeding ground for ragsto-riches success and tells how he came to make certain investment decisions, using plain English and the odd dash of homespun humor along the way.

“Mrs. B was 89 at the time and worked until 103 — definitely my kind of woman,” Mr. Buffett wrote in this year’s letter, describing the now dead Rose Blumkin, whose family owned Nebraska Furniture Mart, a retailer that Berkshire bought in 1983.

The praise for working to a late age suggests that Mr. Buffett, 83, will not retire any time soon. Still, that will not have stopped Berkshire’s shareholders, and many others, from scouring the report for clues about whom Mr. Buffett has picked as his successor to run Berkshire’s operations. Two years ago, Mr. Buffett said his successor for that role had already been selected.

As he has done in past years, Mr. Buffett heaped praise on Ajit Jain, the head of Berkshire’s reinsurance group and the man who many have speculated will take up the top post. “His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business,” Mr. Buffett said of Mr. Jain.

A rising stock market and strong earnings from its companies helped Berkshire report record profits in 2013 of $19.5 billion, a 32 percent rise from $14.8 billion in 2012. Mr. Buffett has long used book value per share — a measure of Berkshire’s net worth belonging to shareholders — to assess the company’s performance. That rose 18.2 percent in 2013, much less than the 32.4 percent rise in the Standard & Poor’s 500-stock index.

“As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value,” Mr. Buffett said.

One way for Berkshire to grow is to make more acquisitions. But as Berkshire gets bigger, the acquisitions also have to be sizable to make a noticeable difference to the company’s overall earnings.

The Heinz deal showed how Berkshire could make a substantial deal while sharing some of the financial burden with others. Berkshire bought Pittsburgh-based Heinz in partnership with 3G Capital, an investment firm led by Mr. Buffett’s friend Jorge Paulo Lemann. The team-up could allow Berkshire to acquire more of Heinz.

Writing about the company, Mr. Buffett said: “Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times.” Mr. Buffett, however, offered few details on how Heinz was performing, except to say its 2014 earnings would be “substantial.”

Berkshire can also grow by acquiring stakes in public companies that it does not control. Its 15 largest stakes in such companies, which include Wells Fargo and Coca-Cola, are worth $98 billion.

In addition to the investment victories, Mr. Buffett dwelled on an expensive failure. Berkshire, he said, had taken an $873 million loss on $2 billion of debt in Energy Future Holdings, a Texas energy company. Buffett said that he expected the company to go bankrupt this year unless natural gas prices go up by a lot.

He acknowledged that he did not consult his longtime investment partner, Charles Munger, before taking on the debt. “Next time I’ll call Charlie,” Mr. Buffett wrote in the report.