Why Buffett Is Buying

The Omaha investor is taking advantage of the market turmoil to fire up Berkshire Hathaway's acquisition machine. Yet a string of recent takeovers has done little to buttress the conglomerate's flagging growth.

By Richard Teitelbaum
Bloomberg Markets, August 2008

Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him.

The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art.

``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. ``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''

Buffett, 77, can afford to throw a little mud on his competitors in the private equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a career stretching back more than 60 years, is on a buying spree.

He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages.

Buffett's biggest catch so far in 2008 was Marmon Holdings Inc., a conglomerate owned by Chicago's Pritzker family. On March 18, Berkshire announced it had bought 60 percent of Marmon from the Pritzkers for $4.5 billion. Buffett is buying the rest in increments during the next five to six years.

Needle-Moving Events

In April, he agreed to pay $2.1 billion for an undisclosed stake in Chicago's Wm. Wrigley Jr. Co. as part of McLean, Virginia-based Mars Inc.'s $23 billion purchase of the gum maker. Buffett, who already owns See's Candies, is helping to fund the deal with $4.4 billion in subordinated debt.

``This is the kind of market where you would expect the pace of Berkshire acquisitions to pick up,'' says Keith Trauner, senior analyst of Fairholme Capital Management LLC in Short Hills, New Jersey. ``In a weaker business environment, sellers moderate their expectations.''

At the same time, Berkshire is now so big that Buffett is having a hard time turning acquisitions into growth. Most of Berkshire's more than two dozen purchases since 2000 are too small to have much impact. ``The larger the company becomes, the harder it is to find needle-moving events,'' Citigroup Inc. analyst Joshua Shanker says.

Past Performance

Buffett agrees. ``Anyone who thinks we will come close to repeating our past performance should sell their stock,'' Buffett told investors at Berkshire Hathaway's annual meeting in May. He declined to comment for this story.

Buffett's focus has turned to philanthropy in recent years. In June, 2006 he pledged 10 million Class B shares of Berkshire stock, worth about $31 billion at the time, to the Bill & Melinda Gates Foundation. The first installment of 500,000 shares was made in 2006, the second of 475,000 in July, 2007.

Each year, Buffett also auctions off a lunch on EBay Inc. to benefit one of his late wife Susan's favorite charities -- San Francisco's Glide Foundation, which provides meals, healthcare and other services to San Francisco's needy. ``It takes people who have hit bottom and brings them back.'' Buffett told Bloomberg TV. ``It's an enormously efficient organization.''

Today Buffett is treating money managers Mohnish Pabrai and Guy Spier to a meal at New York's Smith & Wollensky's after their record joint bid of $650,100. This year's Ebay auction began on June 22 and runs to 10 p.m. Eastern time on June 27.

Affinity for Insurance

The Sage of Omaha, by his own count, now owns 76 companies outright, a number that rises to about 200 if Marmon's 125 subsidiaries, which make everything from water treatment gear to brake drums, are taken into account. Among the Buffett companies are names familiar to most Americans: Geico car insurance, best known for the Cockney-accented gecko in its television commercials; Dairy Queen restaurants; Benjamin Moore paints; and Fruit of the Loom underwear.

Berkshire also owns 8.6 percent of Coca-Cola Co., 13.1 percent of American Express Co. and 8.8 percent of Wells Fargo & Co. Those three investments alone amounted nearly $25 billion on June 24.

Insurance firms dominate the list of Berkshire-owned companies. Buffett controls a dozen of them -- Berkshire Hathaway Reinsurance, General Re Corp. and Geico Corp. are the biggest -- accounting for 31 percent of Berkshire's 2007 revenue.

``I would say we have a special affinity for insurance,'' Buffett said at the 2007 annual meeting's news conference.

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