"Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy."
Since then the only really significant acquisition has been the additives company Lubrizol, for which Berkshire paid about 9 Billion. This represented an approximate 28% premium to the price before the buyout offer. However, despite this acquisition and other small bolt-on transactions, the cash level is higher than when Warren wrote that his trigger finger was itchy. Making an acquisition will definitely serve as a catalyst for the stock. It would be a huge positive given how little return the money is generating in this low interest rate environment. The cash pile currently stands at more than $40 Billion, half of which Warren is willing to use to fund an "elephant" purchase. Warren has also mentioned that if a very attractive opportunity came along he would be willing to sell some equity investments. From the Burlington acquisition it was evident that he is also open to use bridge financing to complete a large transaction. In that instance Berkshire borrowed $8 Billion from banks to complement its own resources. With that in mind we can speculate that Berkshire could be able to come up with $25 Billion in cash plus another $10 Billion in bridge loans to afford an all-cash acquisition of up to $35 Billion.
Now that we have an idea of the type of Elephant that Berkshire is after, we can help Warren evaluate some potential candidates. This is not as difficult as one could initially imagine, since the number of companies this size is actually really small. Starting with the Forbes list of America's Largest Private Companies, one that stands out is Mars. However, even if the controlling family wanted to sell, it would be difficult for Berkshire to acquire the company outright. It would probably have to buy 50-60% initially, with an agreement to purchase the rest in the future (in a similar fashion to how the Marmon deal was carried out with the Pritzker family). Berkshire already has a business relationship with Mars, since it co-invested and helped finance the $23 Billion buyout of Wrigley in 2008.
Another large private company that has many of the characteristics that Warren looks for in a business is SC Johnson & Son. The problem is that these private companies are controlled by families that are in many cases emotionally attached to their businesses, and it is not often that they are interested in exploring a sale transaction.
Turning our attention to public companies there are slightly more elephants that could make the cut: S&P 500 Companies by Market Cap. There are roughly 100 companies in the 17 - 34B market cap range that fall in the "Elephant" category. In this lot we find FedEx Corporation (FDX), with a current market cap of approximately $27.5B. Assuming a 30% premium (in line with the Burlington Northern and Lubrizol acquisitions), the total purchase price is still within Berkshire's possibilities. More interesting though, it shares many of the characteristics that made the Burlington acquisition so successful:
- Very difficult to replicate network, making it incredibly difficult and expensive for competitors to enter the market (as DHL learned not too long ago).
- It is a strong beneficiary of globalization and the resulting increase in commerce. In the case of FedEx, it not only benefits from the increase of physical imports/exports, but also from the growth in global services (global trade is growing faster than global GDP).
- There is an opportunity to invest very large sums of money in capital expenditures, for many years, at reasonable to attractive rates of return. If Berkshire were to acquire FedEx it could allocate vast amounts of capital for bolt-on acquisitions. Competitors in emerging markets could be acquired to further strengthen FedEx's network and improve its already strong business moat.
- It has demonstrated pricing power, and its returns on investment have been increasing in the last few years.
- It has been investing in its network to make it faster, more efficient (e.g. logistics and energy/fuel efficiency), and more flexible.
This can be further illustrated with some slides from a recent investor presentation:
At current valuations both Berkshire and FedEx could offer attractive long-term returns.