For over a year now, investing legend Warren Buffett has been looking to buy something “the size of an elephant” with $128 billion of cash sitting on his investment firm Berkshire Hathaway’s balance sheet. He hasn’t found it yet, and the potential mega-size acquisition has captured the interest of Wall Street investors and casual billionaire watchers alike.
In his 2019 letter to Berkshire shareholders, an annual document religiously read by professional investors, released on Saturday, Buffett reaffirmed his intention for the big purchase spelled out his three criteria for the ideal target.
“First, they must earn good returns on the net tangible capital required in their operation,” the Berkshire chairman wrote. “Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.”
While these sound like basic and reasonable asks for a business deal that could be worth billions of dollars, Buffett confessed that companies that actually meet all three criteria seem impossible to find. “When we spot such businesses, our preference would be to buy 100 percent of them,” he wrote. “But the opportunities to make major acquisitions possessing our required attributes are rare.”
Over the past year, several companies have floated by those familiar with Buffett’s investing habits as potential choices for Berkshire. Those included FedEx, Tiffany & Co. (which ended up being acquired by LVMH in October) and software distributor Tech Data Corp.
“In reviewing my uneven record, I’ve concluded that acquisitions are similar to marriage,” the 89-year-old investor reflected on his 50-year track record in the M&A space, ever so wittily. “They start, of course, with a joyful wedding—but then reality tends to diverge from pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I’d have to say it is usually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships.”
“Pursuing that analogy, I would say that our marital record remains largely acceptable,” he added, “with all parties happy with the decisions they made long ago. Some of our tie-ups have been positively idyllic. A meaningful number, however, have caused me all too quickly to wonder what I was thinking when I proposed.”
Elsewhere in the 14-page letter to shareholders, Buffett discussed in detail Berkshire’s financial performance in insurance, energy, other non-insurance industries, as well as common stock investments, including its highly publicized stakes in Apple, American Express and Coca-Cola.
In the final section, Buffett and his longtime right-hand man, Charlier Munger, 96, touched on another subject deeply concerning shareholders: what will happen to Berkshire when Buffett and Munger are no longer around?
“Charlie and I long ago entered the urgent zone [regarding age]. That’s not exactly great news for us. But Berkshire shareholders need not worry: Your company is 100 percent prepared for our departure,” Buffett assured investors, stressing that both his and Munger’s families are almost fully invested in the company on an eternal basis.
“The Mungers have Berkshire holdings that dwarf any of the family’s other investments, and I have a full 99 percent of my net worth lodged in Berkshire stock,” he wrote. “I have never sold any shares and have no plans to do so…Today, my will specifically directs its executors—as well as the trustees who will succeed them in administering my estate after the will is closed—not to sell any Berkshire shares.”