Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Warren Buffett elicited chuckles earlier this year when the octogenarian said he wasn't convinced he'd be any likelier to reach the ripe old age of 100 by replacing his beloved Coca-Cola with water or his fudge fix with broccoli.

Coke and confections may or may not power the Oracle of Omaha to the century mark. But in the meantime, Buffett is already preparing Berkshire Hathway for the time when he is no longer at the helm, including choosing a successor. Could his recent dealmaking be smoothing the transition as well?

Most of Berkshire's biggest purchases lately have been companies that require significant amounts of reinvestment. By nature, that limits the amount of cash that Buffett's successors will need to invest in the long run, minimizing the opportunity for missteps. 

Picky For a Reason?
Berkshire's biggest solo buys of late have been of companies that require a significant amount of reinvestment, ensuring that its cash balance doesn't excessively balloon
Source: Bloomberg
The list doesn't include Heinz and its later merger with Kraft Foods, transactions Berkshire completed with 3G Capital.

Morningstar analyst Greggory Warren pointed out in a report earlier this month that the conglomerate would have significantly more excess cash if it hadn't acquired railroad Burlington Northern Santa Fe and formed Berkshire Hathaway Energy, each of which has invested an average $4 billion on their own equipment and property in the past five calendar years. 

In 2015, that figure reached $5.9 billion for BNSF, more than double that of U.S. railroad peers like CSX and Norfolk Southern. The sum was described by Buffett as "money well spent." 

Reinvesting
Since 2009, Berkshire Hathaway's capital expenditures have steadily grown, making its pile of free cash flow more manageable for Warren Buffett's successors
Source: Berkshire Hathaway filings

Of course, cash isn't in short supply at Berkshire. Even after the capital outlays, it had a record $72.7 billion on hand as of June 30. And while Buffett has said Berkshire won't let its cash balance go below $20 billion, that still gives it quite a bit of firepower. It can't all be directed toward buybacks and dividends, so deals will continue to play a big part in Berkshire's future.

Buffett has long articulated the financial criteria he uses for takeovers, saying he prefers "simple" businesses that have "good" returns on equity and consistent earnings power. His recent acquisitions fit that bill, but their capital-intensive nature suggests he also may be putting a premium on targets' ability to put excess cash to work. 

Put a Lid on It
Berkshire Hathaway's recent skew toward capital-intensive businesses will help slow growth in the company's cash balances.
Source: Bloomberg
*2016 figure is as at June 30

There's no doubt Buffett's successors will have much to prove when they're eventually forced to step up. But by steering acquisitions toward businesses that will help keep Berkshire's cash pile from ballooning by putting the money to good use, the 86 year-old may be giving them a helping hand.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. In his 2014 letter, Buffett said "Both the board and I believe we now have the right person to succeed me as CEO – a successor ready to assume the job the day after I die or step down" but did not reveal the person's identity.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net