After the much anticipated release of Warren Buffett’s annual letter to Berkshire Hathaway Inc. (NYSE:BRK.B) shareholders last week, many news outlets highlighted Buffett’s lamentation of failing to complete any major acquisitions in 2012. “I pursued a couple of elephants,” Buffett wrote, “but came up empty-handed.”
Of course, Buffett was quick to point out last month’s joint acquisition of ketchup king H.J. Heinz , for which Berkshire put $12 billion of its hard-earned cash to work.
Antelope hunting works, too
However, if you haven’t read the letter — and read it you should — you may have missed an important piece of the puzzle by absorbing Buffett’s thoughts out of context.
Consider the following paragraph from the Oracle of Omaha on page four:
“Though I failed to land a major acquisition in 2012, the managers of our subsidiaries did far better. We had a record year for “bolt-on” purchases, spending about $2.3 billion for 26 companies that were melded into our existing businesses. These transactions were completed without Berkshire issuing any shares. Charlie and I love these acquisitions: Usually they are low-risk, burden headquarters not at all, and expand the scope of our proven managers.”
On the surface, it seems remarkable Berkshire was able to absorb 26 stand-alone businesses into its existing operations without the greater market so much as batting an eye. Of course, given Berkshire’s enormous market capitalization of more than $250 billion, cash on hand of $35 billion (after accounting for the Heinz deal) and growing, and the average acquiree’s size of just $88 million, each of these tiny companies looks like a drop in Berkshire’s mind-bogglingly large bucket.
If anything, the size of these acquisitions looks eerily similar to those typically pursued by “mini-Berkshire” and fellow financial holding company Markel Corporation (NYSE:MKL) which, as I noted last month, tends to focus on buying companies with an enterprise value of less than $300 million. When combined, however, Berkshire Hathaway Inc. (NYSE:BRK.B)’s minor acquisitions nearly approach the total $2.5 billion enterprise value of Markel’s largest-ever purchase in competitor Alterra late last year.
But why (else) do they matter?
From Buffett’s comments, we can also see these small purchases benefit Berkshire in a number of other ways massive acquisitions cannot.
First, acquiring small companies requires taking on little risk with no burden on Berkshire Hathaway Inc. (NYSE:BRK.B)’s headquarters. In short, each acquisition in and of itself is small enough to be managed by existing business segment managers, and should any aspect of the integration fail, it wouldn’t have a significant negative effect on overall operations.