Forget bargains, when it comes to corporate acquisitions there were no companies to be had over the last year at even a “sensible purchase price,” according to billionaire investor Warren Buffett.
In his annual letter to shareholders of Berkshire Hathaway Inc. BRK.A, +0.87%BRK.B, +1.01% Buffett expressed continued frustration over the company’s growing pile of cash, which hit $116 billion at the end of fiscal 2017 versus $84 billion a year earlier. It’s been more than two years since Berkshire’s last major acquisition, the $32 billion purchase of Precision Castparts.
The problem, Buffett implied, seems to lie partly with other chief executives, who seem characteristically ready to open their wallets regardless of price—a game he says Berkshire will never play.
‘Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types.’
Buffett laid out the qualities Berkshire seeks when it goes shopping for standalone businesses, including a durable competitive position, quality managers, good returns on net tangible assets needed to run the business, opportunities for internal growth at attractive returns, and a “sensible purchase price.”
“That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers,” Buffett wrote.
He then devotes a chunk of the letter criticizing a corporate environment that he contends encourages CEOs to be reckless with the checkbook, comparing acquisitive managers to hormone-addled teens.
“Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life,” Buffett wrote.
Cheap debt also played a big role, Buffett said, noting that even a high-price deal can usually boost earning per share if it’s debt financed. Berkshire, however, evaluates deals on an all-equity basis, he noted.
“Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well,” Buffett said, referring to Berkshire Vice Chairman Charlie Munger. “Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.”
Buffett concluded the section of the letter on acquisitions assuring shareholders that he and Munger believe that despite the “recent drought” acquisitions, “Berkshire will have opportunities to make very large purchases.
