Buffett Is ‘On the Prowl’ for Large Berkshire Acquisitions

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., said he’s “on the prowl” for large acquisitions after railroad, energy and some manufacturing subsidiaries posted record earnings in 2011.

Berkshire is seeking “to purchase some large operations that will give us a further boost,” Buffett said today in his annual letter to shareholders. “We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.”

Buffett, 81, has spent more than $35 billion on takeovers since the end of 2009 as operating units generated cash. The billionaire investor, who doesn’t pay dividends to Berkshire shareholders, bought a maker of engine additives in September and a railroad in 2010. Buffett is focusing on acquisitions and buying publicly traded stocks because current yields on bonds, he said, aren’t enough to compensate for the risk of inflation.

Bonds and other bets tied to currencies are “among the most dangerous of assets,” Buffett said. Interest rates “do not come close to offsetting the purchasing-power risk that investors assume.”

Buffett’s letters are reviewed by investors for insight into his views on the economy, markets and corporate governance. Since last year’s letter, Buffett invested $5 billion in Bank of America Corp. and took a stake of more than $10 billion in International Business Machines Corp. Lubrizol Corp., the engine additives maker, was acquired for about $9 billion.

Burlington Northern

Operating earnings last year rose to records at each of Berkshire’s five biggest non-insurance units. Railroad Burlington Northern Santa Fe, toolmaker Iscar Metalworking, Lubrizol, industrial conglomerate Marmon Group and power producer MidAmerican Energy Holdings produced pretax profit of more than $9 billion.

“Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion,” Buffett said. Berkshire bought MidAmerican in 2000, Iscar in 2006 and Marmon in 2008 as Buffett made the company less reliant on insurance operations.

Employment in the U.S. hasn’t kept pace with a “steady and substantial comeback” in the economy, according to the billionaire. The housing industry “remains in a depression” and his prediction last year on the timing of a recovery in residential property was “dead wrong,” Buffett said. In February 2011, Buffett said the rebound would start “within a year or so.”

Housing ‘Depression’

This “hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own,” Buffett said. “I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy.”

Pretax profit in 2011 at Berkshire’s carpet-maker Shaw, insulation provider Johns Manville, Acme Brick and MiTek, a maker of building products, was $513 million, “similar to 2010,” Buffett said. That compares with $1.8 billion in 2006.

“Our housing-related companies sputter,” Buffett said. Employment at these Berkshire units has dropped to 43,315 from 58,769 in 2006.

Buffett said Bank of America will need years to clean up the “huge mistakes” made by the company’s management prior to Brian Moynihan’s promotion to CEO in January 2010. Moynihan has made “excellent progress,” Buffett said, as he works to move beyond losses tied to home loans. Buffett said he had sympathy, in some cases, for lenders hurt by foreclosures.

‘Big Mistake’

“Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost,” Buffett said. “In these cases, the evicted homeowner was the winner, and the victim was the lender.”

Buffett said he made a “big mistake” a few years ago when he spent about $2 billion buying bonds in Energy Future Holdings Corp., the Texas utility formerly called TXU Corp. Berkshire wrote down the holdings by $1 billion in 2010 and $390 million last year as natural gas prices declined. The bonds are now carried by Berkshire at their market value of $878 million.

“If gas prices remain at present levels, we will likely face a further loss, perhaps in an amount that will virtually wipe out our current carrying value,” Buffett said. “Conversely, a substantial increase in gas prices might allow us to recoup some, or even all, of our write-down. However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds.”

Succession Planning

Buffett and Vice Chairman Charles Munger, 88, are preparing Berkshire for its next generation of leaders. The company has hired Todd Combs and Ted Weschler to help manage investments, and directors have selected a candidate to take over as CEO, Buffett said in the letter, without identifying the manager.

The board is “enthusiastic about my successor as CEO, an individual to whom they have had a great deal of exposure and whose managerial and human qualities they admire,” Buffett said. “Do not, however, infer from this discussion that Charlie and I are going anywhere; we continue to be in excellent health, and we love what we do.”

Berkshire has two “superb back-up candidates,” Buffett said.

Last year, before the departure of energy executive David Sokol, Berkshire said it had identified four company managers as possible CEO successors and that one had been singled out “should a replacement be needed currently.”

Berkshire began buying back stock for the first time under Buffett last year as the billionaire bet the shares were undervalued. The company slumped 4.7 percent in 2011 in New York trading while the Standard & Poor’s 500 Index was little changed. Berkshire has climbed 4.6 percent since Dec. 31, while the S&P 500 jumped 8.6 percent.

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