Something I have been thinking about recently is the possibility of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and Warren Buffett (Trades, Portfolio) making an offer for a company that has seen its share price decline significantly over the past couple of months.
This year, the Oracle of Omaha has been notably active, deploying billions of dollars into different opportunities. This is the first time he has been so busy in more than a decade.
In fact, the sheer volume of cash he has deployed in 2022 and toward the end of 2021 comes close to the level of activity recorded immediately after the financial crisis. Buffett said he is being so active because he thinks there are plenty of opportunities for investors to take advantage of. That is why I believe there is a growing chance that he could make a significant acquisition.
Flexibility to do deals
Berkshire has been so successful in creating value for investors over the past couple of decades because the company always has vast capital resources available to deploy when other investors do not have that sort of flexibility.
What’s more, the insurance conglomerate is also highly cash generative. It has a strong balance sheet and is generating billions of dollars in capital every quarter from industries such as utilities, railroads and insurance, all of which are pretty monopolistic.
Buffett created this portfolio of companies on purpose, with the single goal of designing a conglomerate that can weather all market environments.
We are currently facing a sort of macroeconomic environment where Berkshire has the upper hand. It does not have to worry about rising interest rates to fund deals or where it is going to find additional capital to support growth plans. It has the resources available today.
After spending $51 billion in the first quarter of 2022, the company entered the second quarter with $106 billion of cash available. That is more than enough to acquire a substantial business and still leave the $20 billion cash cushion the Oracle has said he wants to keep available to cover any unforeseen insurance losses.
Potential deals
One company that might be on the acquisition list is DaVita Inc. (DVA, Financial). This health care company, which provides kidney dialysis services through a network of nearly 3,000 outpatient centers across the U.S., has been a feature of Berkshire‘s portfolio since 2011.
The conglomerate currently owns around 30% of the health care company. Its stock is down 30% year to date and is currently trading with a market capitalization of $7.6 billion. Even if it has to pay a significant premium, this would be quite a small acquisition for Berkshire to buy out the remaining shareholders.
Another potential acquisition could be Charter Communications Inc. (CHTR, Financial). Berkshire has owned a position in the telecom and mass media company since 2014. The investment is currently worth around $2 billion, or 0.6% of the equity portfolio. Since the beginning of the year, the company‘s market capitalization has fallen by 27% to around $90 billion.
This company has appeared on my radar a couple of times because it looks cheap and is highly cash generative. Free cash flow per share in 2021 totaled $44.06, suggesting the stock is trading close to a free cash flow yield of 10%. Meanwhile, Wall Street analysts are expecting double-digit earnings growth for the next two years. To put it another way, this business is both cheap and growing. The broadband and cable company also exhibits some of the monopolistic qualities Buffett likes to see in potential acquisitions.
Of course, this is just idle speculation as there is no guarantee Buffett will make an offer for either of these companies. However, I think it is worth noting that they are both great businesses and look cheap.
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