Conglomerates

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

Berkshire Hathaway Inc. shares have done nothing but rise so far this month. It may be time for a breather.

Warren Buffett's ever-expanding conglomerate reported second-quarter results last week that again missed the mark. An insurance underwriting loss overshadowed the resurgence at BNSF railroad, as well as continued profit growth in its energy division and the segment that houses a hodgepodge of manufacturing, service and retail businesses. Operating earnings totaled $2,505 a share, missing analysts' average estimate by 10 percent and even falling short of the lowest forecast provided to Bloomberg.

Off Form
Berkshire Hathaway's diverse assortment of businesses again couldn't prevent an insurance underwriting loss from dragging down overall quarterly profit
Source: Bloomberg

Berkshire's class A shares ended Friday at $270,000 apiece before the results were released. They climbed for 10 consecutive days and appeared well on their way to a record winning streak -- the longest being 13 days in April 1989, according to data compiled by Bloomberg that dates back 30 years. The class B shares were already on a record 15-day run. 

All About The Benjamins
Mixed results for the second quarter may snap Berkshire Hathaway's winning streak until Warren Buffett can find a worthy megadeal for the conglomerate's cash stockpile
Source: Bloomberg

Investors will continue to focus on big M&A, as Berkshire's cash has now risen to nearly $100 billion. Excluding what's needed to fund recently announced deals and the cushion Buffett likes to maintain, Morningstar Inc. analyst Gregory Warren figures there's more than $60 billion of excess cash available for acquisitions, investments, share repurchases and dare we say, a dividend

Is Buffett's phone ringing yet? He had expressed frustration at the annual shareholder meeting about not hearing from many willing sellers. Since then, he was said to have been approached by Masayoshi Son, who is desperately seeking a partner for Sprint Corp., the $35 billion struggling wireless carrier. But I explained here why I don't think those talks will amount to anything. 

So far, Berkshire's biggest purchase this year has come out of its energy division, which is buy the parent of Oncor Electric Delivery Co., the largest electric-transmission operator in Texas, for $9 billion. Paul Singer's Elliott Management Corp. is trying to intercept the transaction, but even if Berkshire succeeds, the deal won't put much of a dent in its cash. Berkshire's operations generated more than $8 billion of cash in the past three months alone. 

The Dow Jones Industrial Average crossed 22,000 last week and the S&P 500 index is also near a high, so potential takeover candidates aren't get any cheaper for Buffett. Despite these rich valuations, competition for acquisitions is fierce right now as most large U.S. corporations confront a growth challenge that they're finding can most easily be met via dealmaking. That said, I did compile this list of companies that meet Buffett's takeover criteria, some being more realistic options than others. 

While Berkshire's equity investments -- such as Apple Inc., Kraft Heinz and the airlines -- are helping book value continue to climb, the latest mixed bag of operational results felt like they deserved some kind of commentary from Buffett. That's not something he does; remarks are usually saved for his once-a-year letter and investor gathering and the occasional TV appearance. But just dropping a filing without any update on the elephant in the room (the cash issue) feels increasingly awkward.

Big Bets
For someone who was always hesitant to invest in the tech world, which is outside his expertise, Warren Buffett must be loving that Apple stake
Source: Bloomberg

As I've said before, this lack of transparency relative to most other public companies is a luxury exclusive to Buffett. His successor will have to answer to investors when one large division drags down profit and cash piles up without high-return deployment opportunities. 

Berkshire's stock has been on a tear, but to keep the momentum Buffett needs to work his deal magic. 

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

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