Berkshire Hathaway, under the leadership of legendary investor Warren Buffett, is known for its disciplined acquisition approach, as outlined in Buffett’s 1994 shareholder letter. This prudent strategy has shaped Berkshire’s portfolio into one of the most valuable globally, fostering consistent growth and profitability.
A deep dive into Berkshire’s acquisition criteria presents a blueprint for success for any investor seeking to emulate Buffett’s approach:
1. Size Matters:
Berkshire gravitates towards sizeable businesses, preferring those generating a minimum of $25 million in pre-tax earnings. This threshold ensures that acquired businesses can significantly contribute to Berkshire’s overall portfolio.
2. Consistent Earning Power:
Buffett’s Berkshire avoids businesses in turnaround situations or reliant on future projections. Instead, it targets companies with proven and consistent earning power, aiming for stability over speculative future growth.
3. Strong Returns on Equity:
Berkshire seeks businesses with good returns on equity while employing little to no debt. Such companies indicate financial health and effectiveness in using invested capital, suggesting a lower risk and a higher likelihood of steady returns.
4. Management in Place:
Preferring to invest rather than interfere, Berkshire seeks companies with a competent management team already in place. This criterion allows Berkshire to be an investor rather than an operator.
5. Simple Businesses:
In line with Buffett’s philosophy of investing in what you know and understand, Berkshire leans towards businesses that are simple to comprehend, avoiding overly complex industries or business models.
6. An Offering Price:
Berkshire values transparency and efficiency, requiring an offering price upfront to avoid wasting time in protracted negotiations.
Berkshire Hathaway’s Acquisition Interest and Approach
Berkshire’s interest scales with the size of the potential acquisition, with companies in the $3-5 billion range piquing particular interest. The firm strictly avoids hostile takeovers, offering complete confidentiality and speedy responses (often within five minutes) regarding acquisition interest. While Berkshire usually prefers cash purchases, it may consider stock issuance provided the intrinsic business value received matches what is given.
Despite frequent approaches for acquisitions falling outside these criteria, Buffett and his long-time business partner Charlie Munger remain disciplined. They humorously liken off-target propositions to trying to sell them a cocker spaniel when they’re in the market for a collie, drawing a line from a country song to convey their feelings about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me.”
Conclusion
Berkshire Hathaway’s acquisition criteria, reflecting a focus on profitability, competent management, and simplicity, have remained steadfast over time. This disciplined approach has steered Berkshire Hathaway towards a portfolio of valuable and high-performing businesses. For investors looking for a roadmap to investing success, these criteria can serve as a valuable guide in selecting businesses with a high likelihood of generating sustainable returns.
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