When Warren Buffett buys, he buys big.
That's because the 80-year-old investor — dubbed 'the Oracle of Omaha' for his remarkable market-beating returns — manages a monster.
His conglomerate, Berkshire Hathaway, has a market capitalisation of $213 billion, making it one of the world's largest corporations.
Hence, in order to have any meaningful effect on Berkshire's future returns, the world's third-richest man has to splash out many billions. Happily, at the end of 2010, Buffett's business had around $38 billion in cash and short-term securities.
What's more, after spending $44 billion on buying Burlington Northern Santa Fe railroad in February 2010, Buffett recently warned:
"Our elephant gun has been reloaded, and my trigger finger is itchy."
Warren pulls the trigger
On Monday Buffett duly pulled the trigger on Berkshire's elephant gun, spending $9 billion to buy Lubrizol, a maker of specialist chemicals.
In an all-cash deal (Buffett always prefers to pay cash for acquisitions, rather than use Berkshire shares), Berkshire Hathaway has agreed to buy all of Lubrizol's shares for $135 per share, and assume Lubrizol's net debt of $0.7 billion.
This deal, which was unanimously approved by both company's boards, gives Lubrizol's owners a 28% premium over Friday's closing price of $105.44. In addition, Buffett's bid is 18% above Lubrizol's all-time closing high.
Berkshire and Lubrizol expect the transaction to be completed during the third quarter of 2011.
Buffett loves lube
Lubrizol, which is based in Wickliffe, Ohio, is a leading supplier of industrial lubricants, fuel additives and other specialist chemicals to global transportation, industrial, pharmaceuticals and consumer markets.
Founded in 1928, Lubrizol now has 6,900 employees worldwide, with manufacturing facilities in 17 countries. In 2010, Lubrizol's revenues totalled $5.4 billion.
Buffett explained why Lubrizol caught his eye:
"Lubrizol is exactly the sort of company with which we love to partner — the global leader in several market applications run by a talented CEO."
He then gave some simple advice to James Hambrick, Lubrizol's chairman, president and CEO:
"Our only instruction to James — just keep doing for us what you have done so successfully for your shareholders."
In reply, Hambrick praised Berkshire's "…global investments in technology, assets and employees [and] long-term commitment."
Reload, aim, fire!
Although this is one of Berkshire's biggest acquisitions to date, it certainly won't be the last.
If Buffett wants to keep up his amazing outperformance, he needs to keep fuelling Berkshire Hathaway's engine with growth and diversification, often via acquisitions.
Even after spending $9.7 billion on this transaction, Berkshire will have over $28 billion burning a hole in its pocket — a sum which is growing every day.
Hence, I suspect that it won't be long before Buffett's elephant gun is reloaded, aimed, and fired at another heavyweight target.
An ideal candidate would be a $10-billion-plus company with a long pedigree and a commanding market position which is managed and partly or wholly owned by outstanding, dedicated managers.
Got any suggestions here in Australia? Send them to [email protected]
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