Buffett Is ‘On the Prowl’ for Acquisitions as Cash Hoard Climbs

By Andrew Frye and Noah Buhayar - Feb 26, 2012 12:01 PM GMT+0700

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said he’s “on the prowl” for large acquisitions after record earnings at the company’s railroad and energy units helped build cash holdings.

Berkshire’s cash hoard increased to $37.3 billion on Dec. 31 from $34.8 billion three months earlier, the Omaha, Nebraska- based company said yesterday in it its annual report. Fourth- quarter net income declined 30 percent to $3.05 billion on smaller gains from Buffett’s derivative bets.

Berkshire is seeking “to purchase some large operations that will give us a further boost,” the billionaire said in his annual letter to shareholders included in the report. “We now have eight subsidiaries that would each be included in the Fortune 500 were they stand-alone companies. That leaves only 492 to go. My task is clear, and I’m on the prowl.”

Buffett, 81, has spent more than $35 billion in cash and stock on takeovers since the end of 2009 including the purchases of railroad Burlington Northern Santa Fe and engine-additives maker Lubrizol Corp., both of which had record operating earnings last year. Buffett is focusing on acquisitions and buying publicly traded stocks because current yields on bonds, he said, aren’t enough to compensate for the risk of inflation.

Toolmaker Iscar Metalworking, industrial conglomerate Marmon Group and power producer MidAmerican Energy Holdings (329802Q) combined with Lubrizol and the railroad to produce pretax profit of more than $9 billion last year. All were acquired in the past 12 years as Buffett expanded beyond insurance.

‘Fabulous Five’

“Unless the economy weakens in 2012, each of our fabulous five should again set a record, with aggregate earnings comfortably topping $10 billion,” said Buffett.

The economy is in a “steady and substantial comeback” that has eluded the housing market, he wrote. Buffett said the creation of new households will eventually increase demand for homes, though he was “dead wrong” with his prediction in early 2011 that a recovery would begin within a year or so.

Pretax profit in 2011 at Berkshire’s carpet-maker Shaw, insulation provider Johns Manville, Acme Brick and MiTek, a maker of building products, was $513 million compared with $1.8 billion in 2006 before the housing slump.

Full-year net income slipped to $10.3 billion from $13 billion in 2010 as insurance underwriting profit fell 88 percent to $154 million. Natural disasters including flooding in Thailand and the tsunami in Japan fueled claims costs in 2011.

Buffett has used his annual reports to promote his company as a potential acquirer. Berkshire can act quickly on a deal, provide capital to target firms and allow managers the freedom to supervise the operations they built, he has said.

Wells Fargo

Buffett assembled more than 70 operating businesses selling everything from ice cream to underwear and has said Berkshire needs more takeovers as the firm generates about $1 billion a month in net income. He acquired Lubrizol in 2011 for about $9 billion after saying in last year’s letter that “our elephant gun has been reloaded, and my trigger finger is itchy.”

Buffett also accumulated a stake of more than $10 billion in International Business Machines Corp. (IBM) and invested $5 billion for preferred shares and warrants in Bank of America Corp. (BAC), the lender led by CEO Brian T. Moynihan since early 2010. Berkshire was already the largest stockholder in rival Wells Fargo & Co. (WFC)

“The banking industry is back on its feet, and Wells Fargo is prospering,” Buffett wrote. “At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years.”

Weschler, Combs

Buffett said that Ted Weschler and Todd Combs, former hedge fund managers hired in the past two years to help pick stocks, will both assist the next Berkshire CEO in evaluating potential acquisitions.

“They have excellent business minds that grasp the economic forces likely to determine the future of a wide variety of businesses,” he wrote. “They are aided in their thinking by an understanding of what is predictable and what is unknowable.”

Buffett and Vice Chairman Charles Munger, 88, are preparing Berkshire for its next generation of leaders. Buffett said in the letter that the board is “enthusiastic about my successor as CEO,” without identifying the person.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net