Buffett resorts to $1.2 billion buy back after acquisition deals prove either somwhat elusive or too expensive

News out today that Warren Buffett’s Berkshire Hathaway has spent $1.2 billion buying back 9,200 of its class A shares for $131,000 each from the estate of a long term investor. Berkshire said they may buy more stock in the market at prices up to 120%of book value.  

The A shares of Berkshire are up 2.4% to $133,908 with investors hoping for further multi billion dollar buys to boost earnings per share, but it confirms Buffett’s recent comments that decent acquisitions are hard to come by at current valuations. In other words, the mega-conglomerate and the “Sage of Omaha” are struggling for ideas or sellers willing to sell despite a cash pile of $40 billion and rising.  Berkshire Hathway’s hurdle is high, with historical returns over the life of the company at an annualised rate of over 22% in book value, and over a 10 year period between 2001 and 2011, its book value per share has increased at a CAGR of just over 10%. Examples of the scale of acquisitions that Buffett is prepared to make include the mega buy out of Burlington Northern Santa Fe Corporation, the US rail road company, for $44 billion in November 2009.

In an interview with CNBC in October he said,

”We had two acquisitions this year, possibilities, that were plus and minus 20 billion and where the CEO wanted to do it but it didn’t get done. Prices are tough, we don’t leverage our purchases so we’re buying on an all equity basis. But people who do leverage are getting significant portions of the purchase price at very, very low rates, probably as low as they’ve ever gotten. So that enables them to bid pretty aggressively. And it doesn’t factor into our thinking.”

 “Well, we’re always looking for stocks, and I’ve got two fellows that are working for me that are really looking for stocks all the time, but I usually end up buying more of something I already know. Any new company, any new stock I look at, I measure it against the best idea I’ve got among the present ones. And I’m perfectly willing to just keep adding to the present ones. So it has to beat them. And I know those companies pretty well so it’s a pretty high threshold.”

With the question marks hanging over the hand over of Berkshire Hathaway when Buffett finally retires, the latest news give further food for thought as to the future direction of this monolith of a company.

Contrarian Investor UK