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Warren Buffett says he has $116 billion to spend. Here are five companies he should buy

Key Points
  • Warren Buffett's Berkshire Hathaway has $116 billion it could spend on acquisitions.
  • Buffett has said he's having trouble finding potential targets.
  • CNBC has five potential ideas for Buffett.
These are the companies that Warren Buffett should buy
These are the companies that Warren Buffett should buy

Warren Buffett's Berkshire Hathaway wants a deal, but according to Buffett's most recent annual letter to shareholders, it simply can't find one that both fits its criteria and is trading at an affordable valuation.

At year-end last year, Berkshire Hathaway had $116 billion in cash and short-term Treasury bills, the letter revealed.

The letter outlined the kinds of companies Buffett is looking for, a set of criteria that has not digressed much over the past several years. They include: "durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

Buffett's annual shareholder letter shows record profits
Buffett's annual shareholder letter shows record profits

CNBC has some ideas for Buffett.

1.) Illinois Tool Works, market cap: $56.2 billion

This industrial conglomerate is right in Buffett's wheelhouse: an under-the-radar-screen stalwart with a solid cash flow. Its businesses, which span a diverse range from food equipment to construction products, tend to have high market share — another Buffett qualifier. An acquisition of Illinois Tool Works would mimic his blockbuster acquisition of railroad Burlington Northern Santa Fe, which Buffett described as a "bet on the country." Since Illinois Tool get a large share of its revenue from the U.S., it should benefit from higher U.S. economic growth.

2.) Campbell Soup, market cap: $13.4 billion

Campbell Soup has long been an acquisition target, but the time may be finally right for a deal and for Buffett-backed Kraft-Heinz to be an acquirer.

Campbell recently announced its acquisition of Snyder's-Lance, a deal the company is using to diversify away from its slowing soup business into snacks. But if integrating Snyder's hits a snag that could drag drown the soup company's stock to a price to Buffett's liking.

Meantime, the Dorrance family, which controls Campbell, has historically been opposed to selling. That said, pressure on Big Food is at an historic level, as seen by the rapid pace of industry deal making already this year.

A Kraft-Heinz acquisition of Campbell would provide numerous synergies as it creates a massive food giant. The deal could also be structured to allow the Dorrance family to keep their ever-important dividend.

3. Parts of General Electric, market cap $123 billion

From Buffett's own mouth: The Oracle earlier on CNBC acknowledged that, with the conglomerate now trading at roughly $14 a share, he could afford the whole company, should he want to.

The industrial conglomerate has certainly had a rough patch, plagued with accounting and management issues. But Buffett knows the company and has invested in it before during the financial crisis. An investment which, according to Buffett, made him some money, though not as much as his investment in Goldman Sachs at a similar time.

If Buffett does buy part of GE, a solid candidate could be its airline leasing business, considering Buffett's optimism regarding the airlines industry. Buffett has said the airlines' bankruptcy-riddled "bad 20th Century" is behind them, with U.S. airlines having posted a stretch of profitability, helped by a plunge in fuel prices in mid-2014.

4. AmeriSourceBergen, market cap $22 billion

This is our dark horse choice. The acquisition of one of the country's primary delivery systems for pharmaceuticals could create the ecosystem needed for Buffett's new health-care venture. Buffett is working on the initiative with Amazon and J.P. Morgan Chase in an attempt to cut health-care costs and improve services for U.S. employees. The goal of the operation is to create a health-care system that's free from profit-making incentives. But even so, the new company needs the infrastructure to supply drugs to its network.

Here is why the idea is a dark horse: Buffett himself played down the idea of buying a health-care business to tie into the initiative on CNBC earlier Monday. The business is also trading at a rich premium, stoked by chatter about a potential deal with Walgreens Boots Alliance.

That said, if a deal with Walgreens were to fall apart, the valuation would slip and Amerisource might want to have a partner considering the pending CVS-Aetna deal that was announced a few months ago.

5. Southwest Airlines, market cap $34.8 billion

Buffett told CNBC he wouldn't rule out owning an entire airline. One name that has been speculated is budget airline Southwest. Analysts at Morgan Stanley said the airline could be a logical acquisition target last year, due to its free cash flow, management and domestic focus.