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Buffett’s ‘Trigger Finger Is Itchy’ for Takeovers at Berkshire

-- Warren Buffett said he’s looking for “more major acquisitions” after the economic recovery and the purchase of the Burlington Northern Santa Fe railroad helped increase fourth-quarter profit at his Berkshire Hathaway Inc.

“Our elephant gun has been reloaded, and my trigger finger is itchy,” Buffett said of the outlook for deals in his annual letter to shareholders on Feb. 26. Omaha, Nebraska-based Berkshire reported a 43 percent gain in profit in the three months ended Dec. 31. The company’s cash holdings rose to $38.2 billion at year-end, the highest in three years, compared with $34.5 billion as of Sept. 30.

Buffett, 80, is seeking takeovers as economic expansion boosts results at Berkshire’s subsidiaries and near record-low interest rates limit the returns available in fixed-income markets. Net income in the three months ended Dec. 31 surged to $4.38 billion, Berkshire’s highest quarterly profit since 2007.

“He’s saying that the economy is turning and he’s not as concerned about having the extra capital available for his own operating companies,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “That’s a good sign.”

Buffett, Berkshire’s chairman and chief executive officer, completed his biggest takeover, the $26.5 billion Burlington Northern purchase, last February. The unit contributed $1.03 billion to earnings in the fourth quarter.

Stock Rebound

Book value, a measure of assets minus liabilities, rose in the last three months of 2010 to $157.3 billion from $149.7 billion on Sept. 30 as earnings and stock advances boosted capital. Berkshire, whose operating units span power production and freight hauling as well as consumer goods and insurance, said full-year earnings were boosted by gains at toolmaker Iscar Metalworking Cos. and NetJets, the luxury flight unit.

The profit increase halts Berkshire’s streak of quarterly earnings declines at two. Net income fell in the second and third quarters of 2010 as derivative bets soured. In the fourth quarter, Berkshire booked a $2.49 billion gain on Buffett’s derivative wager on an advance in global stock indexes. Some results were calculated by subtracting figures for the first nine months of 2010 from the full-year data provided Feb. 26.

Acquisitions may help boost earnings as investment returns at Berkshire’s insurance subsidiaries slide. Investment income produced by units including reinsurer General Re and car coverage specialist Geico fell 5.9 percent in 2010 to $5.19 billion. Buffett said that may decline further in 2011 as investments he made during the credit crisis mature.

The yield on two-year U.S. Treasuries fell to a record low of 0.31 percent on Nov. 4 before rising to 0.71 percent on Feb. 25. The two-year note’s average yield over the last 10 years was more than 2.5 percent.

Updating Aesop

“We could get lucky and find an opportunity to use some of our cash hoard at decent returns,” Buffett said. “That day can’t come too soon for me: To update Aesop, a girl in a convertible is worth five in the phone book.”

Goldman Sachs Group Inc. and General Electric Co. will probably return the $8 billion that Buffett invested in 2008 for preferred securities paying 10 percent, Buffett said.

“The GE and the Goldman preferreds are going to get redeemed, Berkshire is taking in $1 billion of cash per month” in earnings and the company’s insurance units provide investable funds, said Glenn Tongue, a partner at T2 Partners LLC, which invests in Buffett’s firm. “You put all those together and they’re going to have $60 billion in a year from now” in cash, Tongue said.

Terrible Behavior

Todd Combs, whom Berkshire hired to help with investments, will start by managing $1 billion to $3 billion, Buffett said. The company may add one or two more fund managers, while Buffett continues to oversee “the great majority” of the portfolio, according to the letter. Combs, a former hedge fund manager, will get a salary and a contingent payment based on performance relative to the Standard & Poor’s 500 Index, Buffett said.

“The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich,” Buffett said. “We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments.”

Berkshire reported a count of 260,519 employees, up about 1.3 percent from the 257,113 workers in the previous annual report, which included the Burlington Northern staff. The railroad’s employee count rose 8.6 percent to 38,000. Clayton Homes, Berkshire’s prefabricated-housing unit, cut about 1,700 jobs to 10,439 employees. Berkshire’s corporate office employed 21 people, unchanged from the previous year.

Housing Rebound

Berkshire’s units tied to home construction “continue to struggle,” Buffett said. “A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.”

Berkshire has climbed 5.9 percent this year on the New York Stock Exchange through Feb. 25, beating the 4.9 percent advance of the S&P 500.

Buffett, who refers to Berkshire’s stockholders as “owners,” shuns quarterly conference calls with analysts and institutional investors, preferring to communicate by sending the letter and taking questions at the company’s annual meeting.

“Commentators today often talk of ‘great uncertainty,’ Buffett wrote. “Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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