Buffett Wants a Big Deal. Lately, He's Settled for Small OnesBy
Latest investments net quick paper profits, hardly dent cash
Berkshire Hathaway’s cash pile has swelled near $100 billion
It’s been a while since Warren Buffett struck a big deal, but that hasn’t kept him from settling for smaller trophies.
On Monday, investors learned that the billionaire’s Berkshire Hathaway Inc. made a $377 million bet on Store Capital Corp., a real estate investment trust that largely caters to service businesses. (Think health clubs and preschools.) That transaction followed a similar-sized agreement last week to prop up Home Capital Group Inc., an embattled Canadian home lender.
Buffett’s imprimatur as one of the world’s savviest investors sent the value of both businesses soaring, earning Berkshire quick paper profits. Still, the transactions do little to resolve a nagging challenge: His firm is sitting on a record amount of cash.
“Shareholders are much more concerned with what Buffett will do with the $100 billion in his wallet” than these deals, said David Rolfe, a fund manager who oversees about $6.5 billion including Berkshire stock.
For the past five decades, Buffett has steadily built Berkshire into a sprawling conglomerate through ever larger transactions. The last huge deal -- a $32 billion takeover of Precision Castparts Corp., a supplier to the aerospace industry -- was announced in 2015. Since then, profit from Berkshire’s dozens of operating businesses like railroad Burlington Northern Santa Fe and auto insurer Geico have refilled the coffers.
That situation prompted Buffett to tell shareholders at Berkshire’s annual meeting last month that he was ready to do a major deal and that he wouldn’t sit on the cash forever. The billionaire has been reluctant to pay a dividend and rarely buys back his company’s stock, saying that he can do better for shareholders by deploying the funds back into the business or making new investments.
“At a point, the burden of proof really shifts to us, big time,” Buffett said at the May 6 gathering. “There’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash.”
Even though the two new investments hardly strain Berkshire’s resources, investors probably will welcome the additions. The deals were struck at attractive terms. And they probably didn’t eat up much of Buffett’s time.
In both instances, the billionaire relied on one of his deputy investment managers, Ted Weschler, to study the opportunity and work out details. He’s leaned on his other backup stock picker, Todd Combs, to play a similar role in the past.
The money managers are a key part of the succession plan at Berkshire. Buffett, 86, has signaled that Weschler, 56, and Combs, 46, will eventually oversee all of the company’s investments and help the next chief executive officer with acquisitions.
“These deals sound like batting practice for Ted and Todd,” said Rolfe.
In the case of Home Capital, there’s another benefit: The deal burnishes Berkshire’s reputation as a financial firefighter. In addition to paying C$400 million ($300 million) for an equity stake in the lender, Buffett agreed to extend a C$2 billion line of credit to the company.
The funding helped shore up confidence in Home Capital, which had been pummeled by short sellers who’ve spent years questioning its underwriting and management. The lender was also facing a wave of withdrawals from savings accounts.
“The goal was to put out the flames,” said David Sims, co-manager of the Eagle Capital Growth Fund, which holds Berkshire shares. The investment helped “stabilize things.”