I don’t often like to post about famous money managers or investors, especially Wareen Buffet since I think the coverage of him is saturated.

There is another reason that I don’t pay much attention to him and his company, Berkshire Hathaway, like I did when I first started investing: his company has little room to maneuver. Buffet calls the company “his masterpiece” or his amalgamation of a lifetime of adept investing decisions. There is no denying that his life’s work is indeed impressive. Through intensive daily research, knowledge, insight and conviction, he has built Berkshire up from scratch to become what is today the 7th largest company in the S&P 500 and made him one of the richest men in the world. The stories of his enduring frugality and humble lifestyle are legendary. Also worth noting, and not as often discussed, is that Buffet has shown stunning versatility throughout his career. He has been willing to change his investment focus and even its underlying thesis to pivot towards a new growth phase. Initially, he invested in dying companies whose stock was trading for less than the cash value of their assets. Then mid career, he switched to brands that can strongly defend their margins and most recently, he switched over to areas he had long shunned: airlines and technology, through purchasing shares in Delta and Apple.

Source: Author’s calculations, as of May 1

Although Buffet recently sold out of all his airline stocks, which I think was a good call, he has held on to most of his other investments. Berkshire has been known to build up cash for long periods of time to be able to take advantage of market downturns and crises. We are coming off one of the longest expansions in US history, and a bull market that lasted over 10 years which has created a big problem for the company: it has too much cash.

Currently, the stockpile sits at $137 billion. This is a massive amount of money and certainly more than the company was sitting on only a few years ago.

Source: Author

Only 8 years ago, Berkshire had $38 billion and people thought that may have been too much to be sitting on. You would think that given the market downturn, Berkshire would have made their move and snapped up a company at a good price. There are a number of reasons why this didn’t happen and why the cash pile Buffet is sitting on may be difficult to deploy quickly.

The Fed Put

Buffet has admitted that the Fed intervention which has provided a lot of market support recently, came so quickly that he was not able to position himself to take over a company. You may think that having the money to purchase a company sitting around would be relatively easy, but when we are talking about massive companies, with insular cultures and global operations, it isn’t so simple.

The first reason being that Berkshire likes to acquire companies that want to be acquired by Buffet. He is not an activist investor like a Carl Icahn or looking to make a hostile takeover. For this style of takeover, you don’t just announce it to the press and hope everything goes smoothly. It involves a secretive process of approaching the management, the board and potentially significant owners to gauge whether they are on board for a sale and whether they would vote in favor of an acquisition.

Knowing Berkshire, they have their eye on a company or they already own a piece of it already. They own a number of companies outright such as BNSF, Duracell and Fruit of the Loom, yet Berkshire keeps a closely watched portfolio of minority stakes in public companies as well. These holdings consist of a number of financial companies and notably Apple.

Source: Visual Capitalist

The second problem starts to become more evident here. Berkshire is massive now, it has hundreds of thousands of employees as well as hundreds of billions in assets. In order to make a difference in the long term an add significant value to shareholders they can’t be meek and buy say, a company worth a billion dollars. They need to move into the tens of billions and potentially even into the hundred billion mark to make a significant and long lasting acquisition.

To date, Buffet’s largest total acquisition was BNSF railroad in 2009. That acquisition was valued at $44 billion and Buffet already had owned 22.6% of all of the shares outstanding. He has to pay a 31.5% premium on the closing stock price the day before it was announced so it’s no wonder that he wants prices to fall further before making an acquisition. Acquiring a company isn’t like you or I going online to buy Coca-Cola stock, he needs to offer a significant premium to entice investors to vote in favor and hence get paid themselves.

The Back of the Envelope Speculation

So given that we know these things, why not engage in some speculation as to what Berkshire may acquire were it to put the whole $137 billion to use.

First let’s assume Berkshire will have to offer a significant premium similar to the 31.5% paid for BNSF. That would discount the cash pile down to about $104 billion for purchases. Let’s also assume things won’t start looking attractive for Buffet again until the market falls another 20% from its current valuation. At that point, the 40th largest company in the S&P right now, Costco could be within reach, give or take a few billion.

Other names that pop up that are notable are Nike, Wells Fargo, IBM, American Express and UPS just to name a few. This gives you a sense of how massive this cash pile is. Under the scenario above, there are only about 40 companies that Berkshire could not buy outright in the S&P 500.

The possibilities could be monumental for the company. Union Pacific would allow the company majority control of all the railroad freight in the US. This is not likely to be approved by regulators so may be off the table. UPS could be a play on the shifting economy and people getting things delivered more than ever. Nike offers a fantastic brand with fierce loyalty from consumers. Buffet has owned both IBM and American Express in the past or does so currently. He could also be tempted to do something he hasn’t done before either, buy a bank outright. Although I don’t think this is likely due to the fact that he would likely have to divest his holdings of other banks and the possibility for too many regulatory headaches, he has the potential to do so.

Source: Author’s calculations, as of May 1

Still Other Options

The other option could be outside of buying a company though. Recall that during the crisis in 2008, a number of firms came to him asking for financing which they thought would give them some headline boost and shore up investor confidence. These included GE and Goldman Sachs. Rather than invest outright in ownership, Buffet negotiated a preferred share stake which paid him 10% annually. This was an expensive and painful cost for these firms which ended up paying him hundreds of millions for the right to have his Midas touch on their brands. With so many companies looking at situations where they may be strapped for cash in the medium term, could this be a solution for the cash pile again this time?

What I suspect is that Berkshire knows they will have to put this cash to work at some point. The recent run up in the market I see as fleeting, a bear market rally. As I discussed don my last post there are just too many factors at play, including wildly high unemployment and chain reaction bankruptcies that seem to be leaning towards a medium term stagnation in the economy. Couple this with the uncertainty of how the virus will play out and you have all you need for an extended bear market heading into 2021. It pays to be patient, the worst would be to use all this massive dry powder at the beginning of a downturn and realize that you could have gotten a company for even cheaper.

Conclusion

Is there one last big acquisition left in Buffet? You can’t help but think that at 89 this may potentially be his last downturn in the economy. Knowing that this is his life’s work, I would think there is a strong temptation to go out with a bang.

There is an analogous story to those who are watching The Last Dance about the Chicago Bulls last 97-98 title run. Michael Jordan talked about how he wanted to go out with a bang and not be walked off the court at the end of his career. Being a competitive person with a live of investing, I can’t imagine that Buffet is thinking any different. Let’s hope he gives us one more show.

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