Warren Buffett’s involvement in a $23 billion deal for H.J. Heinz Company (NYSE:HNZ) signifies the Oracle of Omaha’s desire to put the trove of cash at Berkshire Hathaway Inc. (NYSE:BRK.A) back to good use.
After taking out Heinz, analysts suspect Berkshire Hathaway has as much as $15 billion in additional cash it needs to deploy – cash that earns shareholders paltry returns invested in cash equivalents, not companies.
But what will Buffett buy next? Investors who can front-run Buffett into his next acquisition stand to make large returns on the premium paid to take the company private. I’ll highlight two different companies that could soon be acquisition targets for Berkshire Hathaway.
Buffett’s next move has to fit two very basic criteria. These deals would be digestable (less than $30 billion in equity) and blend well with Buffett’s preference for predictable, borderline boring revenue sources.
Following these basic rules, I’ve identified two companies that would best fit Buffett’s target acquisition size and strategy. One would extend Buffett’s buying streak while another would put it to an end. One would give him more capital to invest as he pleases, while another would tie up virtually all of Buffett’s remaining cash pile.
My two dark horses for the next Berkshire acquisition are:
The Chubb Corporation (NYSE:CB). , AKA “The Float Reloader”
Warren Buffett’s penchant for the insurance industry is founded on a huge source of value creation: using the float from an insurance business to make major investments. The Chubb Corp. is well-known as a signature brand in insurance with strict underwriting standards and industry-leading underwriting profits.
Since 2007, the company slashed diluted shares outstanding from 400 million to 275.25 million shares, a sign of shareholder-friendly managers that Buffett loves to have working under him. These share repurchases alone have helped Chubb’s share price swell more than 61% in just the past five years despite zero top-line revenue growth.
As an add-on benefit, a Berkshire-led acquisition of Chubb would give Buffett access to a $50 billion investment portfolio to be invested as Buffett sees fit. If the Oracle is ready for more and bigger deals, a Chubb acquisition would give him the capital necessary to do it. A P/E ratio of 14 makes Chubb affordable, even if acquired at a substantial premium to the current market price.
General Mills, Inc., AKA “Classic Buffett”
This basic and boring consumer staples company would fit in perfectly with a portfolio that includes companies like Fruit of the Loom and The Pampered Chef.