Berkshire Hathaway Inc. used acquisitions to expand into putting greens and anti-aging tonic derived from mushrooms as Warren Buffett empowered subordinates to build their units while he pursues bigger deals.
Berkshire, which Buffett said is “on the prowl” for large buyouts, increased the domains of deputies Vance Bell and Tim Kenesey with smaller purchases, adding synthetic-turf maker Southwest Greens International and a malpractice insurer. Lubrizol’s James Hambrick, who sold his engine-additives company to Buffett for about $9 billion in September, reached agreements for at least three takeovers, including Active Organics Inc., maker of the mushroom extract remedy.
Buffett, 81, praised Berkshire managers in his Feb. 25 letter to shareholders for negotiating deals to bolster the size of a company that already comprises more than 70 operating businesses selling everything from ice cream to underwear. Lubrizol will have “many opportunities” to pursue takeovers in the specialty chemical industry, and investors can expect acquisitions that expand wine and spirits distribution for Berkshire’s McLane trucking unit, Buffett wrote.
“It really comes down to Buffett trusting these managers,” said David Rolfe, chief investment officer at Wedgewood Partners Inc., who helps oversee about $1.6 billion and owns stock of Omaha, Nebraska-based Berkshire. “When I read or hear these things, I applaud. He gives these folks that type of freedom to allocate capital.”
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Buffett’s letter highlighted the purchase of Princeton Insurance Co., New Jersey’s largest provider of medical liability coverage, to bolster Kenesey’s Medical Protective business. The billionaire chairman and chief executive officer said he hoped for more deals from managers such as Paul Andrews, who runs Berkshire’s Fort Worth, Texas-based electric components distributor TTI Inc.
Berkshire draws profits from operating businesses such as See’s Candies for Buffett to invest elsewhere. He discourages deputies from accumulating excess capital at their units, said Guy Spier, CEO of Aquamarine Capital.
“There’s a clear understanding between him and his managers that if they’re retaining capital, they’re going to have to generate a nice return,” Spier, who oversees about $110 million and owns Berkshire stock, said in a phone interview. “I have a pretty high degree of trust in that system.”
The financial strength of Berkshire, with $37.3 billion in cash, gives units such as carpetmaker Shaw Industries the flexibility to pursue takeovers when their markets are slumping and some of the best opportunities may be available, said James Armstrong of Henry H. Armstrong Associates.
Buffett’s five housing-related companies, including Acme Brick and Shaw, posted pretax profit of $513 million last year, less than a third of their 2006 earnings. Home prices in 20 U.S. cities dropped more than forecast in December to the lowest level since the housing crisis began in mid-2006.
“Housing is still flat on its back,” Armstrong, who’s based in Pittsburgh and owns Berkshire stock, said by phone. “Most carpet companies don’t have the ready cash or the confidence to go out and do a lot of acquisitions, but Shaw can do that because they’re backed by such a Fort Knox of capital.”
Shaw, led by Bell, acquired Sportexe in 2009 to enter the sports turf market and bought Southwest Greens last year for an undisclosed amount, the filings show. Kennesaw, Georgia-based Southwest Greens installs putting greens and bocce-ball courts.
Acme last year acquired Jenkins Brick Co., the Montgomery, Alabama-based producer that was started to supply material used to build a beehive factory. Berkshire spent $50 million on the leading brick maker in Alabama to prepare for an eventual recovery in construction, Buffett said last year.
Lubrizol has already agreed to three acquisitions, costing $493 million, according to Buffett’s letter. Lubrizol reached a deal to buy Barcelona-based Merquinsa, the maker of thermoplastic polyurethanes, which are used in hydraulic hoses and running shoes; formulated-grease maker Chemtool Inc. and Active Organics, which sells extracts to cosmetic companies.
Lubrizol’s Hambrick “is a disciplined buyer and a superb operator,” Buffett said in his letter. Buffett and Vice Chairman Charles Munger are “eager to expand his managerial domain.”
Deals by Buffett’s subordinates are often overlooked by investors because few details are provided and the purchases are dwarfed by the CEO’s takeovers, said Whitney Tilson, co-founder of T2 Partners LLP in New York. Buffett spent more than $26 billion in 2010 buying railroad Burlington Northern Santa Fe.
“We spend almost no time thinking about these small bolt-on deals,” Tilson, who oversees about $150 million and owns Berkshire stock, said by phone. Still, “I would bet that if I went into the details of these acquisitions and saw the price Berkshire paid for them, I’d think these were perfectly good.”