Every year the financial media spends a lot of time trying to guess Warren Buffett (Trades, Portfolio)'s next acquisition. This process generates a lot of attention, but it misses several key points about Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and Buffett today.
Equity investments
There are four main reasons why this hunt for the next big deal is misleading, in my view.
For a start, last year Buffett spent just over $30 billion buying stakes in businesses on the stock market. Some might overlook this spending because Buffett's stock investing activities are usually dissected separately from Berkshire's business activities, but as Buffett noted in his 2020 annual letter:
"As I've emphasized many times, Charlie and I view Berkshire's holdings of marketable stocks – at yearend worth $281 billion – as a collection of businesses. We don't control the operations of those companies, but we do share proportionately in their long-term prosperity."
From this perspective, one could argue that Buffett completed one of his largest deals of all time in 2020 by spending $30 billion on equities for Berkshire's portfolio.
Bolt-on acquisitions
As well as the large headline deals completed by Buffett and Berkshire, the latter's subsidiaries also conduct their own bolt-on deals. The group's latest 10-K gives us some insight into the volume of deals completed by subsidiaries throughout 2020:
"In each of the past three years, we also completed several smaller-sized business acquisitions, which we consider as "bolt-ons" to several of our existing business operations.
Aggregate consideration paid for bolt-on acquisitions, net of cash acquired was approximately $130 million in 2020, $1.7 billion in 2019 and $1.0 billion in 2018. We do not believe that these acquisitions are material, individually or in the aggregate to our Consolidated Financial Statements."
Mid-large deals
As well as the smaller deals, Berkshire has also been pushing ahead with larger, multi-billion dollar deals. Last year, the group completed two of these deals.
One was with Dominion Energy (D, Financial), whereby Berkshire acquired all of Dominion's natural gas transmission and storage business. The total value of this deal, excluding debt, was $2.5 billion.
On top of the natural gas deal, Berkshire also acquired MLMIC Insurance Company, a writer of medical professional liability insurance domiciled in New York:
"The acquisition price was approximately $2.5 billion. As of the acquisition date, the fair value of MLMIC's assets was approximately $6.1 billion, primarily investments ($5.2 billion), and the fair value of its liabilities was approximately $3.6 billion, primarily unpaid losses and loss adjustment expenses ($3.2 billion)."
Reinvestment
Berkshire's most significant expenditure last year by far was not any of the deals above. The group's single most considerable outlay last year and for the past three years (I'm excluding the purchase and sale of equity securities) was reinvestment in the group.
In 2018, Berkshire reinvested $14.5 billion. In 2019, it invested $16 billion and in 2020, the group invested $13 billion. The bulk of this capital spending occurred at Berkshire Hathaway Energy (BHE) and BNSF. As the group's 10-K reported:
"Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. Capital expenditures of these two operations were $9.8 billion in 2020 and we forecast a similar amount of capital expenditures in 2021."
This spending has probably generated more wealth for Berkshire and its investors over the past decade than any other investments. In his 2020 letter, Buffett reported that over the past 21 years, BHE's earnings have grown from $122 million to $3.4 billion per annum, which is a compound annual growth rate of 17.2%.
The bottom line
So, Berkshire may not have completed any large, headline-grabbing deals last year, but all of the above suggests the group spent a combined $50 billion last year on growth initiatives.
Disclosure: The author owns no share mentioned.
Read more here:
- A Closer Look at Berkshire Hathaway's Insurance Losses in 2020
- Warren Buffett's Annual Letter: Buying Stocks and Buying Businesses
- Warren Buffett and BYD: The Investor's Green Tech Investment
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