Industrials

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

(Updated )

For most companies, big acquisitions take a while to pay off -- sometimes years, if ever. That's unless, of course, you're talking about Warren Buffett and Berkshire Hathaway Inc.

It's been only nine months since Buffett's deals for Precision Castparts and Duracell closed, transactions which together totaled around $40 billion. And it looks like the aerospace-parts maker and battery brand are already earning their keep. Berkshire's manufacturing division, which also comprises older acquisitions such as Lubrizol specialty chemicals and Shaw Industries carpets, just posted its best return in at least two years:

Utmost Precision
The manufacturing division earned $1.98 billion on $12.1 billion of revenue in the third quarter
Source: Bloomberg, Berkshire Hathaway filings

This helped contribute to a 6.6 percent increase in the sprawling company's total operating earnings for the third quarter, but which at $2,951 a share were still a little short of the average analyst estimate, according to data compiled by Bloomberg. (Berkshire's profit was partly pinched by BNSF, the North American railroad system Buffett bought in 2010, as the industry contends with weak freight demand and diminishing pricing power. BNSF's operating income was down 11 percent year over year as revenue slid 7.7 percent.)

What was interesting about the Precision Castparts deal was that the always-price-conscious Buffett, 86, paid a not-so-cheap price. The transaction valued Precision at about 13 times its then-trailing-12-month Ebitda. That's in line with the median multiple for U.S. mergers and acquisitions this year, but that median multiple is also near a historic record.

Still Tops
Berkshire Hathaway has risen about 4% in the 12 months ended Nov. 4. If you trust sell-side estimates, the stock will jump an additional 12% in the next 12 months
Source: Bloomberg

Earlier this week, I noted that elevated M&A valuations could be a tad concerning. But the difference between Buffett and everyone else is that he doesn't rely on synergies to justify transactions. Berkshire also has more cash than it knows what to do with -- as opposed to other giant companies, which are putting themselves deeper into debt in a desperate attempt to juice growth.

Yet again, the Oracle shows how it's done. The question is, what happens when he's no longer the one holding the elephant gun?

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

(Fixes spelling of Buffett's name in first paragraph of column originally published Nov. 4.)

  1. Before that time, Marmon Holdings was reported separately from the rest of Berkshire's manufacturing businesses, so the numbers may not be comparable. 

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

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