New York (CNN Business)Warren Buffett wants to make a big acquisition — and the Oracle of Omaha’s Berkshire Hathaway conglomerate has nearly $130 billion in cash that he can use in a deal. But what would Buffett deem worthy of buying at a time when stocks remain near record highs?
Soaring valuations have kept Buffett, who prefers to take the long-term view and wait for bargains, on the sidelines since his last major acquisition in 2015. Buffett told the Financial Times last week that Berkshire Hathaway (BRKB) turned down an overture last fall by jewelry retailer Tiffany (TIF) to buy it.
The FT said Tiffany approached Buffett after LVMH, the luxury goods company run by Bernard Arnault (one of only three people on the planet wealthier than Buffett), made a bid for the company. Tiffany eventually agreed to a LVMH (LVMHF) takeover.
Tiffany may have been too pricey for the Oracle’s taste, but the 89-year-old Buffett has made no secret of his desire to do another major deal, and soon.
In his February 2019 annual shareholder letter, Buffett wrote that he and vice chairman Charlie Munger, who turned 96 last week on New Year’s Day, continue to “hope for an elephant-sized acquisition.” And even at their ages, “that prospect is what causes my heart and Charlie’s to beat faster. “
It’s now been more than four years since Berkshire’s last big purchase — the $32 billion buyout of aerospace components maker Precision Castparts. Chatter surfaced Tuesday that Berkshire might be interested in buying a stake in beleaguered aircraft giant Boeing (BA), but that it would not be an outright acquisition. Berkshire Hathaway did not respond to requests for comment.
Market too rich for Buffett’s blood?
Boeing could make sense as a small investment given that Berkshire already owns stakes in four big airlines — United (UAL), Southwest (LUV), American (AAL) and Delta (DAL) — and also owns all of private plane company NetJets, notes Meyer Shields, an analyst at KBW.
Shields quickly added that he thinks that Buffett is probably not going to overpay for anything — no matter how badly he may want to do a deal.
“The market seems kind of expensive. So if everything is expensive, then the right thing to do is buy nothing,” Shields said.
Shields added that if there is a pullback, Berkshire could buy up the remaining shares of one of its airlines. Buffett loves the transportation sector, and Berkshire already owns railroad Burlington Northern Santa Fe.
Berkshire and Buffett probably would like to stick to industries they know well, such as consumer products — despite the fact that Berkshire’s big investment in Kraft Heinz (KHC) along with private equity firm 3G has been a major flop, according to CFRA Research analyst Cathy Seifert.
“I expect most acquisitions will still be in the consumer staples and discretionary space, but the black mark that Kraft Heinz has left on the Berkshire track record has probably made Buffett a little gun shy,” Seifert told CNN Business. “The fact that Berkshire would have turned down Tiffany speaks volumes about the company’s reticence.”
A bigger move into tech by Berkshire?
Buffett’s affinity for Apple (AAPL) (now the firm’s largest holding) suggests that Berkshire could acquire a tech company, according to Nancy Tengler, chief investment officer of Berkshire Hathaway shareholder Tengler Wealth Management.
Apollo wound up buying Tech Data for about $6 billion, or $145 a share. It had previously bid $130 a share for the company.
Apollo said in a press release last November that Tech Data had received a “superior proposal” from an unnamed rival bidder — which was said to be Berkshire Hathaway — prompting Apollo to raise its offer. Berkshire had no comment on reports that it was the other bidder for Tech Data.
Tengler said cybersecurity companies could be a good fit for Berkshire’s massive insurance business, noting that CrowdStrike (CRWD) or CyberArk (CYBR) might be tempting targets — even though she conceded that tech may still not be Buffett’s strong suit.
But she added that Berkshire’s younger investing lieutenants Ted Weschler and Todd Combs have increased their clout at the company. Combs was recently named the new head of Berkshire-owned auto insurer Geico — which could make him a front runner to eventually take over for Buffett.
At the very least, the increased responsibilities for Combs could signal that the new guard at Berkshire might be more willing to make investments once considered verboten for the company.
Of course, Berkshire could continue to hoard its cash. Or find other uses for it, such as its recent $10 billion investment for preferred shares of oil company Occidental (OXY).
But Tengler suggests that Berkshire could also put some of the cash to use by finally paying shareholders a dividend, especially since Berkshire stock has lagged the market lately. The company has only done so once in its history — in 1967.
“The irony is not lost on us that Buffett often invests in companies that pay a dividend but he is not willing to offer one himself,” Tengler said.