Berkshire Hathaway’s (NYSE:BRK-BD) annual meeting this past weekend brought with it the usual questions including who would eventually replace Warren Buffett. On that front Buffett indicated simply that his successor might take over while he is still alive.
Another question had to do with what what Buffett and company planned to do with the $96.5 billion in cash it has. According to Buffett, at least part of it - $15 billion - would be paired up with an equal share from 3G Capital to help The Kraft Heinz Co. (NASDAQ:KHCC) buy Unilverer PLC (NYSE:ULC), a company the duo made a pitch for in February that Unilever declined. Would there be more than that? Speculation continues.
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Burning A Hole
In a CNBC interview last week Buffett said, “I hate cash,” clearly implying he is ready to make a deal. At the same time, he said low interest rates were making it difficult because competitors could challenge him with borrowed money which is, “so cheap.”
Observers expect a deal, if there is one, to be for acquisition of a big-name company that meets Buffett’s standard criteria of having a strong competitive advantage and solid, predictable earnings.
The Speculation Machine
Various and sundry analysts and Buffett-watchers have suggested Berkshire might be interested in acquiring a company like Costco Wholesale Corp. (NASDAQ:COSTB) or Nike Inc. (NYSE:NKEC), both of which appear to meet Buffett’s criteria – large businesses he can understand, consistent earning power, returns on equity and little or no debt.
Actually, Costco only earns $0.03 per $1 in sales, but since it makes its profit on membership sales, has nearly 87 million members and a membership renewal rate of 90%, those earnings are nothing if not consistent.
Other Iconic Brands To Think About
Besides being well-known household names, each of these companies is strong and reasonably profitable. Any of them could be on Berkshire’s short list of M&A targets. In fact, according to experts, a deal north of $100 billion is not out of the question.
A History Of Huge
The notion of Berkshire Hathaway and Buffett making a gigantic acquisition is not a surprise to anyone who has paid attention to the Oracle’s buying habits. In 2009, it was the Burlington Northern Santa Fe railroad. Berkshire bought Heinz in 2013 and merged it with Kraft in 2015 to form The Kraft Heinz Co. (NASDAQ:KHCC).
In 2014, Berkshire bought Duracell from The Procter & Gamble Co. (NYSE:PGC) and in 2015 did the biggest deal ever for the company buying out aircraft components maker, Precision Castparts for $32 billion. The question of “Who is next?” is yet to be answered.