The challenge looming over Warren Buffett is whether Berkshire Hathaway, the vast business empire he has built over five decades, can continue to make the sort of large acquisitions that will help it grow at a pace to sustain his reputation as America’s shrewdest investor.
But Mr Buffett, in Berkshire’s annual report released early on Sunday, highlighted the large deals his company made last year, including acquiring H.J. Heinz – and strongly hinted at how future big purchases might take place.
”With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size,” Mr Buffett said.
Last year, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $US5.6 billion. ”NV Energy will not be MidAmerican’s last major acquisition,” he said.
Jeff Matthews, a hedge fund manager who has written books on Berkshire, said he detected a strong desire for more acquisitions. ”I think it’s way more than a hint,” Mr Matthews said in an email. ”He clearly sees more deals at MidAmerican.”
Every year, Berkshire’s annual reports are devoured as avidly as best-selling novels. The main attraction is Mr Buffett’s letter to shareholders, in which he often extols America as a breeding ground for rags-to-riches success and tells how he came to make certain investment decisions, using plain English and the odd dash of homespun humour along the way.
”Mrs B was 89 at the time and worked until 103 – definitely my kind of woman,” Mr Buffett wrote in this year’s letter, describing the now-dead Rose Blumkin, whose family owned Nebraska Furniture Mart, a retailer that Berkshire bought in 1983.
The praise for working to a late age suggests that Mr Buffett, 83, is not about to retire. Still, that will not have stopped Berkshire’s shareholders, and many others, from scouring the report for clues about a successor to run Berkshire’s operations. Two years ago Mr Buffett said that his successor had already been selected.
As he has done in past years, Mr Buffett heaped praise on Ajit Jain, head of Berkshire’s reinsurance group and the man many have speculated will take the top job.
”His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business,” Mr Buffett said of Mr Jain.
A rising stockmarket and strong earnings from its companies helped Berkshire report record profit in 2013 of $US19.5 billion ($21.8 billion), a 32 per cent rise from $US14.8 billion in 2012. Mr Buffett has long used book value per share – a measure of Berkshire’s net worth belonging to shareholders – to assess its performance. It rose 18.2 per cent in 2013, much less than the 32.4 per cent rise in the Standard & Poor’s 500-stock index.
”As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value,” Mr Buffett said.
Even though the stockmarket is trading at highs, he did not contend that stocks were overvalued, as he has in past annual reports.
One way for Berkshire to grow is to make more acquisitions. But, as Berkshire grows, the acquisitions also must be sizeable to make a noticeable difference to the company’s overall earnings.
The Heinz deal showed how Berkshire could make a substantial deal while sharing some of the financial burden. Berkshire bought Heinz in partnership with 3G Capital, an investment company led by Mr Buffett’s friend Jorge Paulo Lemann. The team-up could allow Berkshire to buy more of Heinz.
Writing about the company, Mr Buffett said: ”Certain 3G investors may sell some or all of their shares in the future, and we might increase our ownership at such times.” However, he offered few details about how Heinz was performing, except to say its 2014 earnings would be ”substantial”.
Berkshire can also grow by acquiring stakes in public companies it does not control. Its 15 largest stakes in such companies, which include Wells Fargo and Coca-Cola, are worth $US98 billion.
Mr Buffett’s annual letters are well read because they make investing seem simple, often using down-home anecdotes.
New York Times
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