Deals and IPOs

Investors Line Up for Buffett Clues

Brooke Masters, Chief Regulation Correspondent
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There is a cottage industry dedicated to answering the question: "what would Warren do?"

Warren Buffett's investment principles, laid out in his annual letter to shareholders of Berkshire Hathaway, have inspired guides, imitators and even children's books. Thousands travel to Omaha, Nebraska each year to hear him elaborate at the conglomerate's annual meeting.

When the next dispatch arrives late on Friday, readers will hope to find an explanation of the thinking behind his latest $12 billion-$13 billion investment, the purchase of ketchup maker Heinz with Brazilian buyout group 3G Capital.

Yet the letter is likely to answer in only the most general terms the query: "what will Warren do next?"

What is clear is that he will make more big investments. Berkshire's contribution to the bid, which values Heinz at $28 billion, will still leave the collection of more than 70 different businesses Mr Buffett has amassed over four decades awash in cash.

At last count, the company had a $48 billion cash pile and, as Mr Buffett discussed the Heinz deal, he said he was he was "ready for another elephant, so if you see one walking by just tell me."

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Last year he said that he had turned down two $20 billion deals, while a disclosure by the NYSE Euronext indicates that Berkshire at least considered making a bid for the exchange.

Yet part of the challenge of trying to predict Mr Buffett's next move is that the way he invests has changed dramatically over time.

His reputation was built from the 1960s through to the 1980s on picking very cheap stocks, for instance an $11 million investment in the Washington Post that grew to be worth more than 40 times the initial stake.

The "Sage of Omaha" also purchased businesses he liked, often found close to home and run by people he knew, such as National Indemnity, an insurer, in 1969, and Nebraska Furniture Mart in 1983. However, when he paid $700 million for preferred shares in Salomon Brothers just before the stock market crashed in 1987, it was Berkshire's largest ever investment.

At the start of the 1990s, he began to declare in his annual letters that he was looking for companies in the $2 billion to $3 billion range, and in 1995 he doubled the size of Berkshire with two small deals – Helzberg Diamonds and RC Willey Home Furnishings – and one big one for the insurer Geico.

Mr Buffett paid $2.3bn for the half of Geico that Berkshire did not already own, having spent just $45.7 million to accumulate the first half by 1980. Since then he has signed a steady stream of deals, buying another 27 companies worth more than $1 billion, according to Dealogic.

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Swallowing companies whole has always been his preference, says Robert Hagstrom, chief strategist for the Legg Mason Investment Council and author of The Warren Buffett Way. "It allows him to do what he thinks is the most important thing, which is to allocate the capital to businesses as he sees fit".

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So the buying spree has taken in large utility companies, manufacturers, insurers and much more. The unifying themes are simply that Mr Buffett thinks them to be good businesses and, until Heinz, that they have good management already in place.

"We don't go into companies with the thought of effecting a lot of change. That doesn't work any better in investments than it does in marriages," said the 1987 letter to investors.

Such criteria suggest family controlled businesses will always be in demand, and two of Mr Buffett's largest acquisitions have been controlling stakes in Marmon Holdings – a conglomerate run by the Pritzker family – and Iscar, an Israeli toolmaker.

The investor, who helped fund the takeover of Wrigley by Mars, is likely to be one of the first calls should patriarch Forrest Mars Jr ever seek a secure home for his family's confectionery empire.

Yet with a $250 billion market capitalization, Mr Buffett's priorities have shifted again in the last decade as Berkshire has grown so large. "What he really looks for is not businesses that throw off cash, its businesses that can absorb cash," says Thomas A Russo of asset managers Gardner Russo & Gardner, a shareholder since 1981.

The $39 billion purchase of railroad company Burlington Northern Santa Fe, Berkshire's largest ever, is a prime example. With his power and utility assets Mr Buffett has invested in durable capital intensive businesses that offer a solid return, and potential for expansion. Indeed, it is adding to Berkshire's many existing businesses that appears to have kept Mr Buffett busy, scooping up more than 130 small companies for undisclosed sums since 1995.

A long-term observer of Heinz speculated that Mr Buffett could see such potential for the food company, once his new partners at 3G Capital have paid down some of the debt and worked to cut costs: swallowing up another food company in the way that Inbev took over Anheuser-Busch, for instance.

Campbell Soup was once considered a possible partner, while Mr Russo points to Reckitt Benckiser, a company increasingly focused on pharmaceuticals which happens to own the French's mustard brand: "It's a huge business, but orphaned there. What could be better than French's mustard teamed with Heinz Ketchup?"

Other shareholders are also excited by the combination of 3G and Mr Buffett, even if they cannot predict what lies ahead. Kase Capital's Whitney Tilson says: "I'm trembling with greed at the deals to come."