BRK cash - for buy back?

[KinAlberta]

I'm wondering what the odds are that Buffett might 'retire' prior to a sale on quality companies or other major opportunities (likely recession driven) that he might buy with his ever growing cash horde. ...and if he retires one way or another BRK's share price might dip (as Buffett himself once predicted) and so the BRK cash could be deployed for buy backs...and if that isn't a consideration / competing opportunity in Buffetts mind.  :)

 

Yes, useless speculation but my mind just does that. Sorry.

[Guest longinvestor]

I speculate on buybacks as well. I get the sense that Buffett would rather that the next guy does the buyback. Should Buffett keep running the show for another 10+ years, the buyback would be like shooting the fish after completely draining the barrel. The current 1.2X is like that. In 10 years, it will be ridiculous at another factor. All speculation, of course. One of the perks of sitting on the ass.

 

[John Hjorth]

Kinalberta,

 

There is really no need to apologize for your post. : -) Personally, I consider your thoughts about this absolutely relevant. At least to me, they are.

 

BRK is about 1/4 of porfolio on overall level, and I'm working with my own and family money.

 

I have expressed impatience about the BRK cash pile before on this board, perhaps I should elaborate on that a bit here. It's not so much about the cash pile as such, but to me it is more about a material part of it is denominated in USD. In taxable accounts I could just exchange cash DKK for cash USD [not possible for me in tax deferred accounts], if I wanted to do that. I would never even consider to do such a thing. To me, cash is cash, and cash is in my own functional currency - absolute nothing else [otherwise it's not cash for me].

 

Personally I feel confident, that Mr. Buffett will remain extremely patient going forward. Mr. Buffett is damn good at it. I also feel quite confident, that the person Mr. Buffett has recommended to the BRK board as his successor possesses the same personal traits.

 

So for me, it's like with starting merging toes with a lady of some age - you have to take the whole package - or not. I'm in - a lot - for the long run. The life expextancies of the Lady of the House and I is about 20 years. I have told her, that if something happens to me before her, and she needs to sell something, the last thing to leave the accounts at the broker is BRK.

 

Your thoughts are a part of the whole situation about :

 

1. What's "the next elephant"?

1a. Will "the next elephant" be a listed company or private company?

2. Share buy backs or perhaps dividends going forward? [Personally, I certainly prefer share buy backs]

3. What about the share buy back treshold price going forward [will it stay at 1.2 x BV , or will it get a lift?]?

 

- - - o 0 o - - -

 

Ref. 1a above, I actually tried to do a search for large private US companies recently, and came up with this : Forbes : Largest private companies.

 

I have made no efforts to try to find information about the financial performance [profits] of those companies, but I'm quite sure - by a rough estimate, that the profits of each company is not north the turnover.

 

Comments:

 

#1 Cargill: Tobacco is mentioned - No go for BRK

#2 Koch Industries - Can you imagine  the Koch brothers in M&A negotiations with Mr. Buffett and Mr. Munger? To me, it's a no go.

#3 Albertsons - Food markets - Retailer - No go.

#4 Dell - Tell me about it.

#5, #6 and for that matter also #11 PwC, Deloitte & E&Y - Private national partnerships/companies [by law in most of the world], figures are just proforma world wide consolidations, this is not a legal entity as such - can't be taken over - no go.

#7 Mars - Tobacco mentioned - no go.

#8 Publix Super Markets - Retailer - no go.

#9 Bechtel - Could be interesting - wonderful company, actually making a difference to the world - I'm pretty sure the family have no intention to sell.

# 10 C&S Wholesale Grocers - Retailer, and tobacco mentioned. No go.

 

- - - o 0 o - - -

 

#10 on the list has a turnover of USD 30 B, according to the list.

 

- - - o 0 o - - -

 

My conclusion: No private US company fits the bill in a way with regard to characteristics and size in way, that it could be a relevant aquisition subject for BRK, with the aim to move the needle. To me, Marmon in '08 was the last "thing".

 

So if not US and private, then perhaps [European or Canadian] and private? - Or listed?

 

To me - based on the above, the next large BRK aquisition will be a listed company, bought in the next downturn, ref. Mr. Buffetts and Mr. Mungers patience.

[gfp]

Mars is very large and doesn't appear to be interested in selling out anytime soon (just announced a $7.7B acquisition and recently bought out BRK on Wrigley) - but I don't think tobacco has anything to do with why it may or may not be a "no-go".  McLane is a huge distributor of Tobacco products - I don't think diversified distributors are "no go's" just because they happen to distribute tobacco products to retailers.  There are a lot of very large private companies globally, which is why Warren is trying to raise BRK's profile abroad - especially in Germany with the Motorcycle Accessories retailer.  Not a 'fit' for BRK, but good marketing to get him on private companies' radar screens.

[John Hjorth]

globalfinancepartners,

 

Thanks for your post. As I have already posted, my post was based on a very rough/totally simple analysis, combined with no checks of facts anywhere, leaving room for at lot of mistakes/errors. It was just ment as a place to start.

 

I will try to do some work on identifying relevant private German companies going forward, and I will post in this topic.

 

- - - o 0 o - - -

 

To me, speculation about the next BRK aquisition, is a much better exercise than just plain speculation. Let's continue "focused" BRK speculation in this topic.

[Dynamic]

Interesting speculation. A brief read through Forbes' descriptions of the top 11 or 12 seemed to indicate no Tobacco producers - it's just that Forbes defines Food, Drink and Tobacco as one industry classification, so Mars, for example, has 6 divisions, none of which include tobacco, but all of which are in food and drink. I think Berkshire's aversion to tobacco is in the potential legal liability for producing a product that is known to be addictive and to kill many of its customers and the potential for reputational damage, especially given the tobacco companies conspiracy to obfuscate and confuse the public about the scientific evidence in the 1970s (see "Merchants of Doubt" for example). The latter may be a reason to be wary of close associations with the Koch brothers too.

 

At no 12, Reyes Holdings superficially looks like it might be a nice fit. Food and beverage distribution like McLane, logistics services similarly, real estate holdings I'm not sure about, but Coca-Cola bottling in about 6 or 7 production facilities sounds pretty attractive and of enduring value.

 

Mars, or course, would also be attractive with many strong consumer brands.

 

Dell is one of the best managed firms in its sector, but it's just bought EMC² and possibly the efficiency of other PC makers has narrowed the gap, so does it have an enduring advantage or other means of generating consistently strong returns as IBM or Apple could be argued to have (I own positions in both of those)? I'd suggest that Berkshire would probably pass on Dell and it's more likely to float publicly when market sentiment is positive than be sold to BRK at a price BRK would find attractive.

 

There's an employee-owner supermarket chain in there - effectively a mutual society or social enterprise - which I wouldn't imagine putting itself up for sale unless they made a big blunder and needed capital to restructure and survive.

 

But in all these cases, Berkshire would only buy in a friendly take-over, if the current owners chose to sell or was forced to sell by getting themselves in difficulties. I don't see Mars selling the whole company, but it could spin out certain divisions or brands or seek future financing from Berkshire. There may be way for Berkshire to swap an interest-bearing security for a unit such as Wrigley, say, in much the same way that Berkshire acquired Duracell as a tax-efficient swap for its equity stake in P&G.

 

Likewise, Berkshire might acquire certain assets within others in this private companies list or from public companies of similar size, either directly or as an indirect result of being a ready source of capital (and a valuable vote of confidence in a troubled firm) during the next crisis.

 

Anyhow, I enjoy the speculation, but I imagine the next big acquisition could well be a surprise to us all.

[John Hjorth]

New list:  Insider Monkey: 11 Biggest Private Companies in the World.

 

About two years old, but still better than nothing. Lot of overlaps to the Forbes list I posted earlier.

 

New US companies not mentioned in the Forbes list: Pilot Flying J [#10 on this list].

 

German companies mentioned in this list:  Bosch, ALDI & Lidl.

 

- - - o 0 o - - -

 

Thank you for adjusting my mistakes, Dynamic. It appears, I was just too lazy while posting. And good points from you in your post.

[rb]

Busch is owned by a foundation with a charter etc... cannot be sold. I don't think the families of ALDI and Lidl will be willing to sell. That being said there are a ton of great private companies in Germany. I'm not sure how many elephants. But I wouldn't be surprised at all to see a series of acquisitions in the 5-10 B range in Germany. However as you have pointed out these days those would just be a snack for Berkshire.

[CassiusKing1]

I remember seeing a write up a few years back discussing In 'n Out Burger. 

 

I'm selfishly waiting for this acquisition to happen so that expansion east will follow!

[Guest longinvestor]

http://finance.yahoo.com/news/berkshire-decker-says-buffett-time-203922049.html

 

No rush or panic with cash @ Omaha.

 

Interestingly, Susan Decker has been appearing in public about BRK. Don't know of another board member talking about BRK. Of course the rest are all in their 90's.

[fareastwarriors]

I remember seeing a write up a few years back discussing In 'n Out Burger. 

 

I'm selfishly waiting for this acquisition to happen so that expansion east will follow!

 

Well, maybe the granddaughter of founder will sell... http://www.sfgate.com/technology/businessinsider/article/In-N-Out-s-reclusive-34-year-old-heiress-reveals-10850993.php

[KinAlberta]

I believe I've posted here on the Corner before on this but, my other long standing curiosity is why Buffett builds cash and not a temporary but growing position in the S&P500 while he waits for opportunities.

 

So... He doesn't time the market but I would guess that the greatest values coincide in down markets and so the cash has greater 'optionality' plus simple value retention to an indexed position.  Otherwise though, he misses S&P500 returns and dividends in up markets.  So the benefit of having cash at the ready seems to indicate that he sees cash optionality during 'normal' to rising markets as greater than a diversified equity holding. (I'm ignoring all the other opportunities such as bonds, bolt-ones etc)

 

Anyway, is cash that powerful?  I assume he sees (or more likely calculates) greater value  between the two in cash in some probabilistic sense. Holding cash for an extended period vs just holding the market... Or of course returning cash to shareholders.

 

 

[james22]

Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer.

 

“He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”

 

It is a pretty fundamental insight. Because once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

 

Suddenly, an investor’s asset allocation decisions are not simply between earning nothing in cash and earning something in bonds or stocks. The key question becomes: How much can the cash earn if I have it when I need it to buy other assets that are cheap, versus the upfront cost of holding it?

 

http://www.theglobeandmail.com/report-on-business/streetwise/for-warren-buffett-the-cash-option-is-priceless/article4565468/

[KinAlberta]

Still, instead of holding cash, holding the market generates fairly stable dividends and that market position can be readily sold to purchase other specific assets as needed. What about the optionality of the market position plus it's higher probability of growth (in simplistic terms that is).

[Dynamic]

Yes, the market index is very liquid if you're small compared to daily volume.

 

However, the market could fall 20-50% just when the opportunities to buy cheap arise, thereby losing you perhaps as much purchasing power as the discount to IV you have waited for in the stock you really want to own.

 

If you're trying to price your purchases in individual securities and nothing on your watch list is below or close to your buy price, it could be a sign that the general level of prices is on the high side and that the market bought at today's prices is not likely to offer an attractive return compared to its likelihood of substantial decline at precisely that future time when you want to deploy your capital for your high conviction  target securities when they offer a good margin of safety and thus promise good returns.

 

Cash and short term high grade bonds do preserve their purchasing power and are supremely liquid, allowing you the option to take full advantage of future low prices.

 

Even if a company has a temporary setback that causes its price to fall relative to its peers, if the market also declines en masse during this period it's likely to only enhance the discount to IV you can obtain.

[jimjam]

Apparently he's been buying stocks recently:

 

“We’ve, net, bought $12 billion of common stocks since the election,” he said in an interview with Charlie Rose that aired on Friday. Buffett didn’t identify the securities that he picked.

 

https://www.bloomberg.com/news/articles/2017-01-31/buffett-bought-12-billion-of-stock-from-election-through-friday

 

[gfp]

Wonder if he's including the Dow common in that number.  Also wonder if he's been liquidating the Dow common

 

edit:  Seems pretty clear from the latest Charlie Rose interview that he has continued adding to a multi billion dollar basket of the major airlines' stocks.  Warren's decision with color from Ted and Charlie it sounded like.  Will be interesting if this basket ends up like the original railroad basket did...

 

Apparently he's been buying stocks recently:

 

“We’ve, net, bought $12 billion of common stocks since the election,” he said in an interview with Charlie Rose that aired on Friday. Buffett didn’t identify the securities that he picked.

 

https://www.bloomberg.com/news/articles/2017-01-31/buffett-bought-12-billion-of-stock-from-election-through-friday

[rb]

$12 billion net is a big a big number. Maybe he's including DOW in that. He tends to be sneaky like that when giving out numbers. Otherwise either:

 

1. He got the waiver from the FED to increase WFC stake.

2. They have a new core position.

3. .... Let's hope it's not an airline

[gfp]

$12 billion net is a big a big number. Maybe he's including DOW in that. He tends to be sneaky like that when giving out numbers. Otherwise either:

 

1. He got the waiver from the FED to increase WFC stake.

2. They have a new core position.

3. .... Let's hope it's not an airline

 

We pretty much know that it is in fact a basket of 4 airline stocks - DAL, AAL, UAL and LUV.  More WFC isn't possible yet.  More PSX would have been disclosed a few days after each trade. 

[Guest longinvestor]

$12 billion net is a big a big number. Maybe he's including DOW in that. He tends to be sneaky like that when giving out numbers. Otherwise either:

 

1. He got the waiver from the FED to increase WFC stake.

2. They have a new core position.

3. .... Let's hope it's not an airline

 

I vote #2; They bought CTL; that way, they don't have to pay rent for the AGMs  hereafter!

 

Re: #3 , they IPO'ed the 1- 800-airoholic number. You got to let the cloners make $$ too.

[Munger_Disciple]

I am kind of bummed that Buffett may have loaded up on airlines. God, I wish he bought back $12B of Berkshire instead....

 

I know it won't happen but I can dream.

[rb]

I am kind of bummed that Buffett may have loaded up on airlines. God, I wish he bought back $12B of Berkshire instead....

 

I know it won't happen but I can dream.

Correct! I can't imagine the airlines being a bigger value proposition than Berkshire right now.

[NeverLoseMoney]

$12 billion net is a big a big number. Maybe he's including DOW in that. He tends to be sneaky like that when giving out numbers. Otherwise either:

 

1. He got the waiver from the FED to increase WFC stake.

2. They have a new core position.

3. .... Let's hope it's not an airline

I think #3.

 

From the Bloomberg article:

 

In November, Berkshire disclosed that it held in American Airlines Group Inc., Delta Air Lines Inc., and United Continental Holdings Inc. at the end of the third quarter. The billionaire said that month that Berkshire also bought a stake in Southwest Airlines Co. since Sept. 30.

 

Buffett told Rose he wouldn’t get into why Berkshire bought the shares, but said that it was “in large part” his decision.

So the investment in the airlines is "in large part" Buffett's decision. The Sept. 30 filings showed relatively small investments in the airlines. I therefore thought they were Ted or Todd picks, but we now know it is mainly Buffett's decision to invest in them. Looking at Dataroma, the airlines were around 1% of the portfolio at the time. Buffett wouldn't have bothered if the amounts invested would remain this modest. I think they bought a lot more of the airlines.

[james22]

The Utility of Cash

 

In a world where cash and most liquid assets that are easily convertible to cash earn a zero return, the utility of cash would seem to be zero. But we would argue that cash is becoming increasingly valuable, given that we are nearly eight years into a bull market, and the fixed income markets are near highs.

 

This is because cash becomes extremely valuable in one circumstance in particular: when financial accidents happen. It certainly feels like we are closer to the place where cash will be more valuable than we have been for eight years. Because of all this, we have continued to liquify our balance sheets, sell assets, pay down bank lines and start to accumulate cash.

 

As a result, at the margin, we will experience lower growth in our operating results in the short term than if we were putting this cash to work productively. But over the longer term, we believe the advantage of having liquid assets when the market turns will far outweigh any drag on short-term cash flows that may otherwise occur. It is during market downturns that very special assets can be acquired. That we are now one of the largest asset managers globally is largely the result of our patience and staying power. Having liquidity at the right times is a big part of this.

 

During periods of illiquidity in the past, we did two things: we protected our franchise, and we acquired many of our greatest initial stakes in assets. Most of these assets would never have otherwise been available at reasonable prices. Our Olympia & York New York office portfolio, our General Growth U.S. mall portfolio, our Canary Wharf London property portfolio, our Babcock & Brown Australian infrastructure portfolio, our Reliant Energy northeast U.S. power portfolio and more recently, investments in emerging markets, namely Brazil, India, Colombia, Peru and China, are all examples of this in action.

 

This does not mean that we have stopped investing. It merely means that around the edges we are becoming more conservative today than we have been over the past eight years. In 2009/2010, we had many attractive opportunities to invest the capital at hand because there were so many deep value opportunities generated by the financial crisis. Today we are being much more selective. And, while we have deployed $20 billion in the last 12 months, our cash resources have also been building over this period of time.

 

Bottom line: cash only matters when it matters. And when it matters, it really, really matters.

 

https://bam.brookfield.com/en/reports-and-filings/financial-reports/q3-2016-letter-to-shareholders

[Jurgis]

Cash? Nah, I think the way to go is to buy airlines. :P