Warren Buffett has assured investors that his methodical hunt for new businesses is not over, despite a pause in stand-alone acquisitions.
Buffett, in his annual letter to Berkshire Hathaway Inc. shareholders, wrote that 2017 was full of acquisition activity by companies based on "cheap debt." He reiterated Berkshire's disciplined acquisition strategy, writing that he and his longtime business partner, Berkshire Vice Chairman Charlie Munger, will have "opportunities to make very large purchases," from time to time.
The chairman, president and CEO of Berkshire attributed the buying furor to eager Wall Street chief executives, encouraged by their company board members and subordinates to justify deals.
"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.
Buffett also attributed the acquisition craze to the "ample availability of extraordinarily cheap debt." Debt-financed deals, he wrote, will usually boost EPS figures in high-priced deals. He drew a distinction with his own company, noting that Berkshire, with few exceptions, evaluates transactions on an all-equity basis.
He argued that it is "insane to risk what you have and need in order to obtain what you don’t need," explaining his and Munger's "aversion" to leverage that has curbed returns over time.
Still, he wrote, despite the company's recent "drought" of acquisitions, Berkshire is looking for those mega-deals to add to its massive and diverse portfolio of businesses.
The 87-year old CEO left out hints of a recently announced tie-up with JPMorgan Chase & Co. and Amazon.com Inc. to create a new healthcare company to service their respective companies. Analysts and industry observers have opined that the three industry behemoths will use their purchasing power to develop the entity. Yet Buffett restated Berkshire's rigid four-pronged acquisition strategy that delivers the highest value to the company, despite the flurry of acquisition activity from others.
In the meantime, Buffett wrote, the company will stick with its simple guideline: "The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own."
Shareholders will hear more from Buffett at the company's annual shareholder meeting on May 5 in Omaha, Neb. The meeting will once again be webcast. The analysts chosen to pose questions to Buffett and Munger are Dowling & Partners' Gary Ransom, who will ask about the insurance business, and Jonathan Brandt of Ruane Cunniff & Goldfarb and Gregg Warren of Morningstar, who will ask about Berkshire's non-insurance operations.
Berkshire reported fourth-quarter 2017 earnings on Feb. 24, showing a year-over-year decline in operating earnings but growth in earnings attributable to shareholders. Book value per class A equivalent share climbed 23% from a year earlier.