Berkshire Buzz: Buffett's Buying

With Annual Meeting Set to Open,
Speculation of a Big Acquisition;
Energy Sector? Or Reinsurance?

By KAREN RICHARDSON and DENNIS K. BERMAN
May 5, 2006; Page C1

Warren Buffett looks ready to spend some big money. The only question is what he'll buy.

Investors and Wall Street denizens are buzzing over speculation that the 75-year-old investment guru's holding company, Berkshire Hathaway Inc., will announce a major new acquisition at its annual meeting in Omaha , Neb. , this weekend.

There are plenty of clues pointing in that direction. Berkshire has built up a cash pile of $45 billion. Mr. Buffett has said more than once that he wants to spend billions of dollars in the energy and utilities sectors. And he has done a spate of smallish deals in recent months, signaling that he is eager to put his shareholders' money to work.

"I suspect when we get to Omaha , we'll learn something of his acquisition pipeline, which is likely to be very fertile right now," says Glenn Tongue, a longtime Berkshire shareholder and a managing partner of hedge fund T2 Partners LLC.

Mr. Buffett declined to discuss the speculation.

In the past four months, Mr. Buffett has agreed to buy Russell Corp., a branded-clothing manufacturer; Applied Underwriters, a workers' compensation insurer; and Business Wire, an electronic news distributor -- deals of several hundred million dollars each. Berkshire's last big buy -- a $5.1 billion deal announced in May 2005 to buy PacifiCorp., an Oregon utility company -- is expected to close in coming weeks.

Like the deal anticipation, attendance at the annual Berkshire meeting is soaring. In 1981, only 12 people -- including several Berkshire employees, along with Mr. Buffett's Uncle Fred and Aunt Katie -- attended the company's annual meeting. Now it's known as the " Woodstock for Capitalists."

This year, "we can handle 24,000 attendees, but I'm not sure what we do next year," Mr. Buffett wrote in a letter to Berkshire directors in April.

WALL STREET JOURNAL VIDEO

Dennis Berman reports on whether Warren Buffett will announce a major acquisition at Berkshire Hathaway's annual meeting.

Berkshire is a portfolio of more than 40 wholly owned companies that together generate $100 million to $200 million in cash a week. Berkshire doesn't buy back stock or pay dividends, so cash piles up fast.

Mr. Buffett in the past few years has lamented what he sees as a lack of acquisition opportunities. Cash-flush hedge funds and private-equity firms compete for deals and push up sellers' expectations and prices, analysts say.

Energy is one industry that Mr. Buffett keeps talking about publicly.

Last year's PacifiCorp deal signaled his desire to be a player in the regulated-utilities industry, which generates healthy, stable earnings growth. And in June he said he plans to spend more than $15 billion in the U.S. energy sector, with future acquisitions in the power sector likely to be done through Berkshire 's MidAmerican Holdings subsidiary.

One company that might fit well into that subsidiary is PG&E Corp., a San Francisco utility with a market value of about $13 billion. A spokesman for PG&E declined to comment, citing a policy of refusing to discuss speculation.

Another industry long favored by Mr. Buffett is insurance, which also kicks off copious sums of cash that Berkshire can invest in securities or use to buy other companies.

Analysts have pointed to Mercury General Corp., a Los Angeles automotive insurer, as an attractive target. Mercury meets some of Berkshire 's six acquisition criteria, which are listed in the company's annual reports. It's big, with a market value of about $3 billion and operating income last year of $361 million, and it has a healthy return on equity of about 16% and little debt. George Joseph, Mercury's 84-year-old chairman and chief executive, said in an interview that he hasn't been approached by anyone at Berkshire .

WARREN COURT

Warren Buffett judges a potential acquisition by six criteria, which are detailed in Berkshire Hathaway's annual reports.

• Go Big: Deals in $5 billion to $20 billion range, companies with at least $75 million of pretax earnings unless it fits into an existing unit.
 
• Consistent Earnings: "Future projections are of no interest to us, nor are "turnaround" situations," the company says.
 
• No Debtors: Companies with good returns on equity, and little or no debt.
 
• Management in Place: "We can't supply it."
 
• Simple Businesses: "If there's lots of technology, we won't understand it."
 
• Price Tag: "We don't want to waste our time or that of the seller" by discussing deals with no price.
 

CAST YOUR VOTE

Question of the Day: If you were Warren Buffett, which industry would you be looking to invest in?

Reinsurance -- insurance for other insurers -- is another favorite for Berkshire , which already operates several such businesses, including National Indemnity, Berkshire Hathaway Reinsurance Group and General Re.

His seeming preference for energy and insurance companies aside, there's no telling where Mr. Buffett will make his next move. He tends to confound crystal-ballers, and his many fans point out that his company's success and longevity stem in large part from his ability to see opportunities well before others do.

Mr. Buffett gets a plethora of investment pitches, and he has acted on some from sources well outside the deal-making business.

In recent years, groups of university students have suggested deals to Mr. Buffett, hoping to collect the "fee" he promises for any idea he executes -- a Berkshire Class B share, currently trading at just under $3,000 each. (Class A shares closed yesterday at $88,000, flat for the year and down 3% over the past two years.)

About 6,800 shareholders of record own at least 500,000 Class A shares each and 16,200 own at least 8.0 million B shares each; there are many more retail investors who own much less.

The finders' fee tradition started in 2003, when a class of University of Tennessee students presented Mr. Buffett with an autobiography of Jim Clayton, the founder of Clayton Homes , a Maryville , Tenn. , housing manufacturer. Berkshire bought Clayton a few months later. Mr. Buffett gave each of about 40 students a Class B share.

He has done a number of deals that at the time seemed out of step with common wisdom, including loading up on a type of risky bonds and silver in the late 1990s when both assets were out of favor.

And nobody predicted Berkshire would become the world's biggest carpet-maker before it bought Shaw Industries in 2000. Mr. Buffett also has been betting against the dollar since early 2002, a strategy that took some hits in the past year or so.

"That's his forte: leaning back into the wind," says Tom Story, a portfolio manager at William Blair & Co. in Chicago , who holds Berkshire shares both for the firm and for himself.

Write to Karen Richardson at karen.richardson@awsj.com and Dennis K. Berman at dennis.berman@wsj.com

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