Sitting on a cash stockpile of nearly $130 billion, Berkshire Hathaway is wanting to make an ‘elephant-sized’ purchase
Berkshire Hathaway (NYSE: BRK.A), Warren Buffett’s company, has been underperforming lately. In 2019, shares of the company gained 11% while the S&P 500 (NYSEARCA: VOO) climbed 29%. It has a huge cash reserve that needs to be invested if the company is going to boost its bottom line.
In 2019, there were two potential acquisitions for Berkshire Hathaway. The first was Tiffany and Co (NYSE: TIF). LVMH (OTC: LVMUY) made a bid of $14.2 billion for the company. Tiffany’s, already an investment of Buffett’s (he bought $250 million worth of the company’s bonds in 2009), assumed that he would be interested. He wasn’t. He felt that the company was overvalued and, additionally, he wanted to avoid a bidding war, as that would violate one of his investment tenets.
The other company he wanted, Tech Data (NASDAQ: TECD) — an unusual target for Berkshire Hathaway as Warren Buffett (save for a few rare occasions) is notorious for avoiding technology sector investments. He viewed Tech Data as a company he could understand (sales and distribution) even though he didn’t know anything about the products. He offered $5 billion for the company but was outbid by Apollo Global Management (NYSE: APO), with an offer of $5.14 billion. Buffett, avoiding a bidding war, made no further offer.
With $128.2 billion in its coffers, Berkshire Hathaway is hunting for an ‘elephant-sized’ acquisition this year. Here are three suggestions:
1. Ingram Micro
There are three reasons to purchase Ingram Micro. Like Tech Data, Ingram Micro specializes in hardware and software distribution. It is also for sale and was put on the market by its parent company HNA Group in August of 2019. Thirdly, it’s larger than Tech Data.
|COMPANY||Tech Data||Ingram Micro|
|REVENUE||$37 billion||$42.6 billion|
FedEx (NYSE: FDX) has had troubles lately that it attributed to everything from the weak global trade to a shortened holiday season due to a late thanksgiving. This has negatively affected FedEx’s net income (from $935 million to $560 million), operating income (from $1.17 billion to $554 million), and revenue (from $17.8 billion to $17.3 billion) between Q2 of 2018 and 2019. It has lost $25 billion in market value.
Warren Buffett is a value investor and FedEx is certainly a value, trading at a 30% discount to the transport sector. Further, FedEx is a company that Buffett understands (another important acquisition principle) as he already owns logistics and transportation companies. Lastly, Buffett likes autonomous companies with high-quality management. Fred Smith, the founder and CEO of FedEx, has won many leadership and management awards in the past and is not planning on retiring anytime soon.
3. Southwest Airlines
As mergers have shrunk the number of airlines operating in the U.S., profits have grown. Berkshire Hathaway holds positions in the top four airlines, including a nearly 10% stake in Southwest Airlines (NYSE: LUV). With 17% of the domestic airline market share, the company had a free cash flow of $3.36 billion in 2019, an 86% increase from 2017’s figure of $1.806 billion.
Southwest Airlines co-founder Herb Keleher; a long-time friend of Buffett’s, was a proponent of the servant leadership philosophy, which puts employees first. This corporate culture resulted in many benefits like 46 consecutive years of profitability, 85% of employees saying they’re proud to work at the company, and no layoffs. The future looks bright for Southwest as it plans to expand to international territories like South America. Investors are constantly speculating on Buffett’s investment plans. Rumors alone sent Southwest Airlines stock surging 4% earlier last year. The man has had his fair share of surprises, like his $10 billion dollar investment in airlines (an industry he has always derided) or his multi-billion dollar position in Apple (NASDAQ: AAPL). In the end, Warren Buffett can purchase any one of the companies discussed or all three and still have roughly $50 billion left over.
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