Currently I am reading Robert P. Miles' text, “The Warren Buffett CEO,” with an objective to get some ideas regarding Warren Buffett’s “hands off” management philosophy. But honestly, you can take way more than that from this text. One such example is the simple but effective acquisition strategy, practiced over the years at Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Although Miles didn’t categorically mention anywhere in his text about the acquisition criteria, Buffett and his partner Charlie Munger have mentioned the unchanging acquisition criteria in every annual report since 1995 (I am not sure about pre-1995 period since I don't have access to pre-1995 annual reports).
The recent merger and acquisition wave lasted for a period of 2003-2008, ignited by shareholders activism, private equity and leveraged buyout. There were successful and unsuccessful merger and acquisition attempts during this period. Several empirical studies have confirmed the shareholders’ (both the acquiring and acquired companies) loss from both successful and unsuccessful takeover attempts. BusinessWeek's Arik Hesseldahl looks at some of the most notable failed M&A deals involving U.S. companies in the last two decades (http://images.businessweek.com/ss/09/04/0407_failed_merger_talks/index.htm).
Looking at the Berkshire acquisition criteria might shed some light in this regard. Surprisingly, the acquisition criteria didn’t change over the years (1995-2011), except one criterion – the size of the acquisition. It was at least $25 million in 1995 and moved up to $75 million in 2011.
Let’s just have a look at the acquisition criteria, excerpted from Berkshire Hathaway’s annual report (it will be the same in any year):
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $25 million of before-tax earnings),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are Ӭ"turnaround" situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can't supply it),
(5) Simple businesses (if there's lots of technology, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even Ӭpreliminarily, about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $3-5 billion range. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer --- customarily within five minutes --- as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much Ӭin intrinsic business value as we give.
Charlie and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll know it's me."
I am quite aware of the availability of the merger and acquisition experts, resources and courses on merger and acquisition at the university level. My point here is to have a look at a simple yet effective acquisition strategy, practiced at Berkshire, which has more than 70 subsidiaries (through successful acquisitions which have added value to Berkshire over the years). For the enterprising readers, I recommend Joseph Calendro Jr.’s text, “Applied Value Investing” that deals with the practical application of Benjamin Graham’s and Warren Buffett’s valuation principles for acquisitions.
Mohammad Siddiquee is a Ph.D. finance candidate at the University of New Brunswick, Fredericton, Canada. He is an avid value investor and runs a value investing research website at www.patienceinvesting.com
The recent merger and acquisition wave lasted for a period of 2003-2008, ignited by shareholders activism, private equity and leveraged buyout. There were successful and unsuccessful merger and acquisition attempts during this period. Several empirical studies have confirmed the shareholders’ (both the acquiring and acquired companies) loss from both successful and unsuccessful takeover attempts. BusinessWeek's Arik Hesseldahl looks at some of the most notable failed M&A deals involving U.S. companies in the last two decades (http://images.businessweek.com/ss/09/04/0407_failed_merger_talks/index.htm).
Looking at the Berkshire acquisition criteria might shed some light in this regard. Surprisingly, the acquisition criteria didn’t change over the years (1995-2011), except one criterion – the size of the acquisition. It was at least $25 million in 1995 and moved up to $75 million in 2011.
Let’s just have a look at the acquisition criteria, excerpted from Berkshire Hathaway’s annual report (it will be the same in any year):
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $25 million of before-tax earnings),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are Ӭ"turnaround" situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can't supply it),
(5) Simple businesses (if there's lots of technology, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even Ӭpreliminarily, about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $3-5 billion range. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer --- customarily within five minutes --- as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much Ӭin intrinsic business value as we give.
Charlie and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll know it's me."
I am quite aware of the availability of the merger and acquisition experts, resources and courses on merger and acquisition at the university level. My point here is to have a look at a simple yet effective acquisition strategy, practiced at Berkshire, which has more than 70 subsidiaries (through successful acquisitions which have added value to Berkshire over the years). For the enterprising readers, I recommend Joseph Calendro Jr.’s text, “Applied Value Investing” that deals with the practical application of Benjamin Graham’s and Warren Buffett’s valuation principles for acquisitions.
Mohammad Siddiquee is a Ph.D. finance candidate at the University of New Brunswick, Fredericton, Canada. He is an avid value investor and runs a value investing research website at www.patienceinvesting.com
