The Fallacy of Buffett Takeover Lists (BRK-A, SYY, VFC, DHR, BNI, WFC, COP)

It seems that there is renewed interest in a Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) acquisition strategy for another large takeover.  This has always been on the table, and as we noted in the most recent annual report, Buffett has mentioned an interest.  He even laid out a set of criteria.  But the new list of companies that is being passed around as a potential target list actually is based upon the current numbers rather than on many of these actually being legitimate targets.

Buffett has stressed that the larger the company, the greater the interest, and as always he looks for businesses that have a longevity projection of “forever” in his search.  His criteria was laid out as companies with at least $75 million of pre-tax earnings unless the business will fit into existing units, consistent earnings history rather than turnarounds or promises ahead, and strong returns on equity with little or no debt.  Buffett also said he wants simple businesses that are easy to understand and that has a management team already in place.

Where this is most interesting is that Buffett has already stated that an offering price needs to be in place.  He even noted, “We don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown.” Buffett said outright that he will not engage in unfriendly takeovers and won’t participate in business auctions.  His preferred target is the $5 to $20 billion range.

But here is where there is a stretch between what is going around right now and what Buffett himself has said:  “We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.” It seems that the mere act of pointing names out could in fact make Mr. Buffett turn the other way.

Bloomberg yesterday ran a list of 46 companies which fit into the criteria.  What is odd about this list is that it seems that the screen criteria only ran numbers that fit into what Buffett said.  But many of these names are going to be too cyclical or too dependent upon too many factors for Buffett to want to buy them.  More importantly, a lot of these companies have been beaten up too much for management to want to sell.

The three big names that were used as points of reference were food supplier Sysco Corp. (NYSE: SYY), clothing maker VF Corp. (NYSE VFC), and medical and consumer tool maker Danaher Corp. (NYSE: DHR).  While Danaher’s policy is unknown to us, our own screening in the past has put Sysco as a company that would not want to be acquired or one that would require too large of a premium for Mr. Buffett to consider upon higher prices.  Our own screening in the past also put VF Corp. as a company that only wants to be an acquirer of brands rather than prey.

There is one company which Buffett has in his current portfolio where Buffett could make a play, and that is Burlington Northern Santa Fe (NYSE: BNI).  Its market cap is $19 billion now that it has fallen by more than half, and Berkshire already holds more than 20% of the stock.  The question boils down to whether or not management would sell at depressed levels.  Buffett might just want to take a larger stake here.

Wells Fargo & Co. (NYSE: WFC) is not one that Buffett would acquire.  Even after the drop, it is far too large.  But he is a huge holder, even in his personal account, and the recent woes took the company down so far that Buffett may have snapped up more shares.  We discussed this with some traders last week as being a possibility, but there has not been any word on this notion yet.  Even with the shares down so much, his stake that we already knew about in Q4 is currently worth over $4 billion.

Some target companies were in the oil patch and a large steel company was in there.  Buffett already got his fingers pinched when he tried to gobble up a lot of Conoco Phillips (NYSE: COP), and that position looked slightly lower than before.  Either way, the recent swings in metals and commodities probably makes Buffett want to steer clear.  He might believe in the “forever” model in those, but if forever comes with too much pain or too many headaches he is likely to stay away.   Conoco was one of our own energy stocks which we think can double, and that assumes no Buffett actions.

One thing to remember about Buffett is that he doesn’t like being predictable.  His appetite is there for a deal, that is obvious.  Ultimately, any of these companies could still fit the bill for Buffett.  It just has to be friendly and we think it has to not be something that has burned him lately.  If it was as easy as having historically low P/E’s right now, Buffett would be out of cash many times over because of all the possibilities.  But whatever business he chooses as that old former phrase of “a whale of a deal” is going to have to be an absolute slam dunk.

As always, here is the full list of Buffett & Berkshire holdings.

JON C. OGG
March 20, 2009