Trying to guess the next Berkshire acquisition? Good luck

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Posted: Saturday, May 4, 2013 12:00 am

It's a game some investors love to play: What Would Warren Buy?

Warren Buffett, chairman and CEO of Berkshire Hathaway Inc., makes no secret that he is hunting for “elephants,” the large businesses that would add to his collection of 80-plus businesses. Thanks to Berkshire's accumulation of cash, he said in 2011, “Our elephant gun has been reloaded, and my trigger finger is itchy.”

Each year Buffett lists his criteria for acquiring businesses. The list hasn't changed much over the years except for needing larger and larger companies to make a significant difference in Berkshire's finances.

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Besides size, Buffett says, a potential acquisition must be in a simple business with an offering price in hand, plus consistent profits, little or no debt and management in place.

To find those sorts of companies, Scott Thompson, managing director of Intrinsic Value Capital Management of Minneapolis and a Berkshire shareholder, found 557 publicly traded businesses with stock valued at $20 billion or more.

Of those, 252 had relatively high profits. Of those, 133 also had low debt. Of those, other qualities that would appeal to Buffett or discourage him from buying narrowed Thompson's list to these 20 that Berkshire doesn't own:

3M Co.

Allergan Inc.

AstraZeneca PLC

Automatic Data Processing

Biogen Idec Inc

Companhia de Bebidas das Americas Ambev

Eli Lilly and Co.

Essilor International SA

Exxon Mobil Corp.

Franklin Resources Inc.

Medtronic Inc.

Microsoft Corp.

Monsanto Co.

Nike Inc.

Novo Nordisk A/S

Pfizer Inc

Potash Corp. of Saskatch

Schlumberger NV

Starbucks Corp.

Stryker Corp.

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Of course, Buffett has other potential investments to consider, including privately owned businesses and companies that are smaller — say, between $5 billion and $20 billion — but still could be considered “elephants.”

The Financial Times lists 431 companies valued at $5 billion or more in developing nations, mostly in China, Brazil, Saudi Arabia, Russia, South Africa, India and Southeast Asia. An additional 158 companies from Japan and 404 Europe are valued at

$5 billion or more.

That's about 1,000 more businesses, plus hundreds of U.S. companies that are privately or publicly owned and valued between $5 billion and $20 billion.

Even so, that's a smaller list of potential acquisitions than Buffett once had. In 1967 he paid $8.6 million for National Indemnity Co. of Omaha, his first insurance business, and in 1992 he paid $82 million for 82 percent of Central States Indemnity of Omaha — both significant purchases for Berkshire at the time.

Because acquisitions usually bring a windfall to shareholders of the acquired companies, some investors try to figure out which acquisitions would be next.

James Mackintosh, investment editor of the Financial Times, recently suggested Kimberley-Clark, PepsiCo, the Southern Co., Consolidated Edison and General Mills.

Pankaj Patel, global research chief of Credit Suisse, suggested some other European companies: Swatch Group, Burberry, Shire, Publicis, Societe BIC, Nokian Renkaat, Novozymes, Coloplast, William Demant Holding and BHP Billiton.

As you can see, it would be expensive to try to invest in all of Buffett's possibilities, hoping that one or more of them would pay off.

The Omaha World-Herald is owned by Berkshire Hathaway Inc.

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