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Berkshire Hathaway and Its Large-Scale Acquisitions

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Apr. 10 2015, Published 9:30 a.m. ET

Increasing reserves

Berkshire Hathaway (BRK-B) has cash reserves of approximately $60 billion and generates approximately $1.5 billion in free cash flow every month. The company hasn’t paid dividends since its inception and has a policy of not doing so. Shareholders and directors of the company approve of this policy.

So, to generate good returns, Berkshire has to continually look for acquisitions. It has to reinvest the cash it generates via the dividends and investment income paid out by its subsidiaries and portfolio companies.

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Investment style

Berkshire looks for acquisitions in the $5 billion to $20 billion range. Companies must have a clear track record of long-term earnings and strong management. They must also be open to a friendly takeover.

The minimum pretax earnings requirement for direct investment is $75 million—earned consistently over a long period. Businesses should earn good returns on equity with very little or no amount of operational debt.

Warren Buffet prefers businesses he knows. That’s why the company still avoids investments in the technology sector.

Berkshire also looks to co-invest with other funds or asset managers on select investments. In 2013, the company went in on a stake in Heinz with 3G Capital.

Berkshire Hathaway competes with private equity majors such as Blackstone (BX), BlackRock (BLK), Goldman Sachs (GS), and Morgan Stanley (MS). Together these companies make up 5.93% of the Financial Select Sector SPDR Fund (XLF).

Berkshire Hathaway also competes with insurance giants including Allianz (ALV), American International Group (AIG), Metlife (MET), and other major players from the energy, industrial, and infrastructure sectors that form part of the iShares Core S&P 500 ETF (IVV).(IVV).

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