Warren Buffett wrote in Berkshire Hathaway’s 2010 annual report that they ‘will need both good performance from our current businesses and major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.’
At that time, he was just coming off his largest deal ever, purchasing the railroad Burlington Northern Sante Fe for $26.7 billion in 2009. In 2013, it appeared that he had bagged his big elephant with the purchase of H.J. Heinz for $23.6 billion, although he split that deal with the private equity firm 3G Capital.
It apparently doesn’t take Buffett long to reload their elephant gun, because today, Berkshire announced their largest deal ever: buying Precision Castparts for $32 billion.
Back in 2010, Buffett had $32 billion in cash on hand. Today they have $61.3 billion and after the Precision deal will still have $38.9 billion in the till, which made me wonder how long it would be before another announcement. Buffett then went on CNBC and said this deal ‘takes him out of the market for an elephant’ and that ‘we will have to reload over the next 12 months or so.’
Precision, a Portland based aerospace manufacturer, closed on Friday at $193.88 per share. Buffett offered $235 per share, representing a 21 percent premium over last week’s price. That’s interesting because the stock was not exactly cheap last week.
According to Bloomberg, the trailing 12-month earnings for Precision were $11.68 per share, which means that the stock was trading at a price-earnings multiple of 16.6 last week and Buffet was willing to accept a 20.1 PE-ratio to buy the business. He said on CNBC that this was a very high multiple for him to pay and is right up there at the top of expensive deals.
Buffett’s willingness to pay up for companies in recent years has caused some investors to criticize him for not being a strict ‘value’ investor, but the Heinz deal ought to remind everyone of one of his sayings, that ‘it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
The Heinz deal, which some thought was expensive at the time, has roughly tripled in value based on higher profitability and substantial leverage. That deal was unique because Heinz bought Kraft, another giant in the food industry (I profiled this deal back in March, which you can find here). Precision is the leader in their industry and there are no obvious combinations.
Precision is also different because the price is suffering some from the drop in oil prices. Through Friday, the total return for Precision’s stock over the last year was -17 percent while the S&P 500 has gained almost 10 percent.
It will be fascinating to see how this deal plays out. I have to admit that I hadn’t heard of Precision (although neither had he until three years ago), but we wouldn’t have been attracted to the stock because it has relatively low gross profits compared to its assets and the valuation is high.
Even though Buffett doesn’t bat 1000 (no one does), I’d be willing to bet that this is a great acquisition for Berkshires in the coming years. The CEO is apparently an excellent dealmaker and he now has Berkshire’s capital and reputation that should allow him to continue to build and maintain a sustainable competitive advantage.
One of the things that I love about Buffett is that he is so disciplined about his long-term time horizon and willingness to invest when others aren’t. Although there have been a lot of deals this year, seeing him invest in a segment that is somewhat tied to energy is encouraging.
Buffett will turn 85 in a few weeks and I sincerely hope that he lives for a long time and has many opportunities to reload his elephant gun because watching him work is fascinating and a lot of fun.