Quiz: What Omaha Fortune 500 company acquired 27 other businesses in 2013?
Not a trick question. It's Berkshire Hathaway Inc., which is hosting its annual shareholders meeting in Omaha today.
The only trick is that few people have heard of most of the deals.
Live coverage: Our live chat begins at 7:30 a.m. and continues through the question-and-answer session with Warren Buffett and Charlie Munger. At 5 p.m., join a post-meeting chat with World-Herald Berkshire Hathaway reporter Steve Jordon. Omaha.com/Berkshire
Berkshire Hathaway events in Omaha
7:30 a.m. to 4:30 p.m.: Berkshire Hathaway/Brooks 5K packet pickup at Hilton Omaha; in-person registration accepted.
9:30 a.m. to 4 p.m.: Annual shareholders meeting. (Doors open at 7 a.m., movie at 8:30 a.m., followed by the Q&A at 9:30 a.m. Booths representing more than 40 companies open in the Exhibition Hall throughout.)
Noon to 4:30 p.m.: NetJets display of aircraft at Signature Flight Support next to Eppley Airfield. Stop by the NetJets booth for shuttle information.
5:30 p.m. to 8 p.m.: Berkshire's Big League Picnic for shareholders at Nebraska Furniture Mart, 700 S. 72nd St. Live entertainment from DJ's Dugout's Blazin' Pianos with food from Famous Dave's, Domino's, Sonic or Paradise Bakery & Cafe.
8 a.m. to 11 a.m.: Berkshire Hathaway "Invest in Yourself" 5K presented by Brooks. The course starts on 10th Street across from the CenturyLink Center Omaha and ends on Riverfront Drive. In-person registration accepted.
9 a.m. to 4 p.m.: Borsheims shopping day for shareholders. Brunch begins at 9 a.m.
1 p.m. to 10 p.m.: Private shareholder event at Gorat's Steakhouse, 4917 Center St. Reservations required.
4 p.m. to 10 p.m.: Private shareholder event at Piccolo's Steakhouse, 2202 S. 20th St. Reservations required.
Last day of Nebraska Furniture Mart special shareholder pricing.
Last day of Borsheims special shareholder pricing. Credentialed shareholders also can receive up to 20 percent off at the new Borsheims Boutique at Nebraska Crossing Outlets in Gretna.
Berkshire's purchases of NV Energy and roughly half of H.J. Heinz Co. made the news because they were big enough (about $32 billion altogether) to require disclosure under federal securities rules.
The 25 others, from $1.9 million to $1.1 billion, are in a category Chairman and CEO Warren Buffett calls “bolt-on” acquisitions by “platform” companies Berkshire already owns.
How valuable are the new acquisitions? Last year’s purchases brought in $800 million in cash and added about $300 million to the company’s annual pretax earning power.
Buffett told The World-Herald that bolt-ons will increase because Berkshire owns more companies every year and company managers are charged with proposing good acquisitions, even if it takes extra money from Berkshire to complete the deals.
“Our companies don’t worry about cash,” Buffett said. “I worry about cash. They don’t have to have it on their own. If they have no cash and there’s a good idea, they’ll get it from me that day.”
Although the purchase prices for the 25 companies totaled $3.1 billion, most were too small to require formal disclosure by the corporation. But some were reported anyway because of news interest.
Buffett wrote in his shareholder letter that Berkshire also bought the remaining shares of industrial companies Iscar Ltd. and Marmon Group, for $3.5 billion, and BH Media’s purchases of four midsize daily newspapers generated newspaper stories during the year.
Future such deals, he said, in aggregate, “will be meaningful.”
Berkshire’s appetite for acquisitions, small and large, is growing, to the point where Buffett said he’s willing to sell any of the company’s stock holdings to buy more operating companies.
Buffett has discussed “forever” investments in the past. In 1989, when Berkshire first became a major owner of Coca-Cola shares, Buffett said, “Our favorite holding period is forever.”
Berkshire is still Coke’s largest shareholder, with 9.1 percent.
“Forever” might be “favorite,” but apparently no stock position is “forever.” “None of the stocks are forever, but they’re for very long terms,” Buffett said recently on CNBC.
His willingness to sell the shares shows his increasing preference for wholly owned companies as opposed to partial ownership through common stock. It’s still important to own the right stocks, he said in his annual letter to shareholders.
“We much prefer owning a noncontrolling but substantial portion of a wonderful company to owning 100 percent of a so-so business; it’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone.”
But if the right business comes along, even at a high price, selling shares in a top investment can be part of Buffett’s financial calculation.
Berkshire has $48.9 billion in cash on hand and will hold onto at least $20 billion to keep its finances solid. That leaves nearly $30 billion in cash to buy businesses, a figure growing by about $1 billion a month generated by Berkshire’s businesses.
Worldwide, there are hundreds of businesses valued at more than $30 billion.
If Buffett wanted to buy a company that cost a lot more than that, he has at least four options:
1. Sell new shares of Berkshire Hathaway, as he did in 2010 when he bought BNSF Railway.
2. Issue bonds, essentially IOUs to investors.
3. Sell some of the $115 billion worth of common stocks that he owns.
4. Share the cost with a partner, as he did with 3G Capital of Brazil for the Heinz purchase.
Buffett doesn’t like No. 1, which would mean splitting Berkshire’s ownership among more shares of stock, or No. 2, which would carry interest costs.
Apparently he would prefer No. 4, finding a partner, to No. 3, which would mean parting with shares of companies he considers in the “diamond” category.
Michael Hupp, an attorney who works in acquisitions for the Omaha law firm Koley Jessen, said Berkshire’s stock holdings aren’t necessarily “instant liquidity” that Buffett could use to purchase whole companies.
“The second he starts liquidating stock in some of these entities, the market’s going to react,” Hupp said. “Unfortunately for him, he could move the market. If he sells a meaningful amount, essentially he’s telling the market that it’s overpriced.”
That could reduce the amount of money that selling the stock would yield, he said, and reduce the market value of the rest of the stock Berkshire owns in the same company.
Not necessarily, Buffett said in an interview.
“That certainly would be true if, in a declining market, we were selling billions and billions worth of a company’s stock,” he said. “But we’ll never be in a position where we have to sell anything at declining prices. When it’s sold, it will be at advancing prices, not declining prices, because we can always deal from a position of strength.”
One bolt-on acquisition last year was close to home: Berkshire’s Oriental Trading Co. of Omaha bought MindWare Holdings, an educational games company, for an undisclosed amount of money last June.
Oriental Trading shifted MindWare’s warehouse and call center work to more efficient operations in Omaha and left its corporate staff, marketing, creative and other executive functions in a Minneapolis suburb.
MindWare is an “adjacent” business, selling a line of educational games via catalogs and online that are new to Oriental Trading, which focuses more on toys, party supplies and novelties. Oriental Trading also closed the purchase of SmileMakers on Friday. The Spartanburg, South Carolina, company sells patient-cheering trinkets to doctors and dentists and brings its medical market dominance to Oriental Trading.
“It’s a great way to create value for Berkshire Hathaway,” said Oriental Trading CEO Sam Taylor. “These companies don’t take any extra management time” for Berkshire’s headquarters office.
That means Buffett and Berkshire Vice Chairman Charlie Munger, with some help from money managers Ted Weschler and Todd Combs and financial assistant Tracy Britt Cool, can concentrate on bigger acquisitions.
Taylor and other CEOs at Berkshire let Buffett know what they’re planning, and he can offer his counsel. But they handle the details of integrating acquired businesses into their operations.
Taylor is looking for more smaller-scale acquisitions that meet Berkshire’s standards. “We take a similar approach,” he said. “We don’t overpay. We pay a fair value. We’re looking for strong companies with good management teams and strong brands and a good business model.”
Berkshire’s 80-plus companies contain a wide range of what Buffett calls “core competencies,” from managing aircraft to marketing zircons. That gives it a wide range of potential acquisitions, and the list grows every time Berkshire gains a large company.
While some businesses might resist being purchased, others seek it out. Jim Zipursky, who manages the Omaha office of investment bank Corporate Finance Associates, said he has met CEOs whose goal is to sell their business to Warren Buffett.
“We’re speaking with a company now that says, ‘Gee, if you can get us in to see them, we’d really like to because that’s who we’d like to sell our business to,’ ” Zipursky said.
Buffett’s style of buying a company and leaving the current management in place to run the business is well-known, and is evident locally: He bought the Nebraska Furniture Mart in 1983 from the Blumkin family, which is still running the store.
“The Berkshire Hathaway growth strategy of acquiring well-run, well-managed, privately held businesses is excellent,” Zipursky said. “It’s a good lesson for any business owner of a privately held business who’s thinking of selling his or her business.”
Buffett didn’t invent the management-in-place requirement for acquisitions, Zipursky said. “What he’s done is perfecting his razor focus on the type of business he’s interested in.”
Nor did Buffett invent the “platform and bolt-on” strategy, which Hupp said enables a company to leverage its expertise and its back room and administrative help while exposing it to new markets and new ideas. “Banks have done it for years, growing by buying smaller banks and eliminating some of the overhead.”
Companies may buy competitors and try to “roll up the industry,” he said. That’s why restrictions on monopolies sometimes come into play.
But Berkshire’s large scale makes the strategy effective, Hupp said. “What Berkshire likes to do is get into different products that complement the products they have. Then they can get access to a whole new customer base and cross-sell as well.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.