There’s certainly no shortage of cash lying around at Berkshire Hathaway Inc. Even so, Warren Buffett’s struggle to find the $407 billion company’s next meaningful acquisition shows that his relative buying power has diminished. If you attended or streamed the shareholder meeting on Saturday, you heard a lot about Berkshire’s soaring cash pile, which stood at $96.5 billion as of the March quarter. And it seems Buffett isn’t getting calls from willing sellers the way he’d like, or as he said:
“It’d be more fun if the phone would ring.”
Finding good takeover targets has proved so challenging, the billionaire hinted that should the cash continue to just accumulate he’d have to consider returning some of it to Berkshire’s investors via buybacks or a dividend. It was a notable statement from Buffett, who has long been against paying a dividend because his dealmaking could produce superior returns.
But Berkshire shares have gained little more than 1 percent this year. They’ve trailed the S&P 500 index, which is currently led by tech stocks. With so much focus on Buffett’s next big deal, there are factors working against him:
1. Scarcity of cheap targets. Stocks are broadly more expensive than what Buffett is used to paying. His success in making acquisitions in part comes down to his ability to drive a bargain for strong companies with impressive management teams and attractive profit profiles. But the S&P 500 has a trailing price-earnings ratio of about 21, compared with around 14 just five years ago. We’ve seen acquirers pay record valuations for big transactions during the past year, even amid political uncertainty in the U.S. and Europe.
2. Not the only buyer in town anymore. Berkshire also faces more competition than ever for takeovers, as the biggest companies in most industries turn to consolidation given a shortage of growth opportunities. While it’s always been viewed as an honor to sell to Buffett, it may be getting tougher to reel in targets if other bidders come knocking with higher offer prices. Buffett doesn’t get involved in competitive processes, and it would be poor corporate governance to negotiate exclusively with him if superior offers could be on the table.
3. Loyal managers. Buffett only wants to buy companies that already have proven leaders in place who are dedicated to running the business for the long haul. A confluence of factors is making that more of a rarity nowadays, though. For example, baby boomers are nearing retirement age and activist hedge funds have been an impetus for turnover at the top of some big companies. There simply aren’t as many family-run, megasized public corporations out there available for Buffett’s taking.
4. 3G’s recent missteps. Buffett could have bought some time by announcing another deal with private equity firm 3G Capital and Kraft Heinz Co., which counts Berkshire and 3G as its largest shareholders. Buffett and 3G had been in the early stages of working on a merger between Kraft and Unilever, but the proposal leaked out to the press and Unilever quickly shut that door. Buffett revealed on Saturday that Berkshire and 3G each would have contributed $15 billion toward the transaction. Now, the folks at 3G need to find another option, but the clock is ticking for them, too, as potential targets streamline their operations themselves and leave less for a would-be buyer to wring out of them.
Whether in conjunction with 3G or not, it’s still likely that Berkshire does a big transaction this year. But it’s certainly taking longer and proving harder than expected. Last week I flagged some potential candidates that fit his takeover criteria in terms of their returns and balance sheets, with some notable names being Hershey Co., Deere & Co., 3M Co. and Nike Inc. This chart shows the complete universe:
But the simple truth is, Buffett has set a high bar for deals and the list of companies that can reach it is getting shorter.