Buffett Deal Pursuit Reshapes Berkshire as Mutual Fund Era Ends

Why Buffett Wanted Precision Castparts

Weeks from his 85th birthday, Warren Buffett is again seeking to reshape Berkshire Hathaway Inc. with the next few decades in mind.

The second-richest man in the U.S. is in talks to buy Precision Castparts Corp., which makes equipment for the aerospace and energy industries, and had a market value of more than $26 billion Friday, according to a person familiar with the matter. Acquiring the company would add about $10 billion in annual revenue and 30,000 employees, boosting the workforce at Berkshire by almost 10 percent.

A deal would push Berkshire further into heavy industry and cut reliance on insurance and stock picking, growth engines for most of Buffett’s 50 years in charge. Today’s Berkshire, with BNSF railroad and renewable energy holdings, could hardly have been imagined in the mid 1990s when the Buffalo News and shoe businesses were prominent units and the company was considered a mutual fund because of its equity holdings.

“Those days are gone,” Lawrence Cunningham, a professor at George Washington University and author of the book “Berkshire Beyond Buffett,” said in an interview. “It’s really an industrial operation now.”

Buffett has also shifted his equity portfolio, cutting back on some long-time holdings. Take the case of Procter & Gamble Co., the razor maker that has long been closely associated with the billionaire and was his third-largest position at the end of 2008. Last year, he struck a deal to trade most of the stock back to P&G in exchange for its Duracell battery business.

‘Phase Two’

Buying companies with enduring prospects is “a different sort of build-up of value” than investing in stocks, Buffett, Berkshire’s chairman and chief executive officer, told shareholders at his annual meeting last year. “We’ve moved into phase two.”

Precision Castparts uses advanced engineering technology to make metal industrial components for jet engines and power plants as well as pipes for the oil and gas industry. While results have been pressured lately on the energy side, pushing down the stock price, that’s probably no bother to Buffett, who is looking for long-term bets where high barriers to entry would discourage potential rivals.

“This is a business that’s multi-decade in nature,” said David Rolfe, who manages about $11 billion including Berkshire shares at Wedgewood Partners Inc. “They have these incredibly long relationships with some of their customers. And people aren’t going to Fred’s moldings or Fred’s castings to get a little bit cheaper part on the inside of a jet engine.”

General Electric Co., Boeing Co. and Airbus Group SE are among the customers of Portland, Oregon-based Precision Castparts, which has declined 17 percent in the last 12 months of New York trading. Berkshire already knew the company well, having acquired a stake in 2012. That holding was probably purchased by one of the company’s deputy stock pickers, Todd Combs or Ted Weschler, given that it’s valued at less than $1 billion and Buffett usually makes much bigger bets.

‘Next Century’

Precision Castparts and Berkshire didn’t return messages seeking comment.

Buffett’s company was a minority investor in Burlington Northern Santa Fe in 2009 when he announced a buyout deal after the railroad’s stock had dropped 13 percent over the prior year. He even agreed to issue Berkshire stock to help fund that deal, something the billionaire usually avoids.

“It’s a good asset for Berkshire to own over the next century,” Buffett said in an interview that year with Charlie Rose broadcast on PBS. “You don’t get bargains on things like that. It’s not cheap.”

Berkshire paid more than $26 billion for the portion of the railroad it didn’t already own, valuing BNSF at $34 billion, and also took on about $10 billion of debt. Still, Buffett has already taken more in dividends from the railroad than he paid in cash to complete the deal.

‘No Bargains’

Jeff Matthews, an investor who has written books about Buffett, said it’s unlikely that a purchase of Precision Castparts will work out as well as the railroad.

“It’s night-and-day different from the BNSF acquisition,” which was announced at a time when there was widespread concern about the economy, he said in an e-mail. “Today there are no bargains like that,” he said, adding that he was considering whether to sell his stock in Omaha, Nebraska-based Berkshire. “I just don’t feel comfortable spending that kind of dough on that kind of business in this kind of market.”

Insurance Slump

The billionaire’s transformation of his company also includes the addition of industrial companies like Iscar Metalworking in 2006 and chemical maker Lubrizol in 2011. Greg Abel, the CEO of Berkshire’s energy unit, has expanded with acquisitions in Canada and Nevada and has said the business may spend $15 billion more on renewable energy after already funding projects including a solar farm in California.

Buffett also backed the merger that created Kraft Heinz Co., and Berkshire said Friday in its second-quarter report that results for the three months ending Sept. 30 will probably include a pretax gain of about $7 billion tied to the transaction. Insurance operations haven’t fared as well lately, posting a net underwriting loss of $38 million in the second quarter, compared with a gain of $411 million a year earlier, driven by deteriorating results at the company’s namesake reinsurance operation.

‘Fabulous Five’

The billionaire, who will turn 85 on Aug. 30, told shareholders in May that reinsurance, in which the company takes on risks from primary carriers, has “turned for the worse.” That’s because hedge funds and other investors have piled into the industry seeking to add premium revenue for investment portfolios.

Buffett for years has been highlighting his push beyond insurance, using the phrase “fabulous five” in 2012 to describe BNSF, the energy business, Iscar, Lubrizol and Marmon, which provides engineered wire and cables and motor-vehicle parts.

Adding Precision Castparts would make the group “the spectacular six,” Cunningham said. “A huge acquisition just reinforces the idea that Berkshire is an industrial conglomerate.”

Warren Buffet Eyes Precision Castparts in $30B Deal
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