What is the Rationale for the Precision Castparts Transaction?



Berkshire Hathaway is a holding company

The merger of Berkshire Hathaway (BRK-B) and Precision Castparts (PCP) is a little different than most deals. Given the lack of overlap between the companies, the transaction has more in common with a private equity transaction than it does with a big strategic deal, such as Baker Hughes (BHI) and Halliburton (HAL).

Article continues below advertisement

How does Berkshire Hathaway compare with other buyers?

Berkshire Hathaway has more in common with private equity buyers than a typical strategic buyer. However, Berkshire Hathaway doesn’t have the restrictions from investors that private equity buyers do. The sole exception to that would be in the insurance business, where any insurance deal would be driven by synergies.

Many private equity buyers have a window to buy a company, restructure it, and then take it public again—or sell it. But no matter what, they must monetize their transaction—in other words, have an exit strategy. Because there is no overlap, there are no synergies to extract.

Secondly, in the acquisition of Precision Castparts, Buffett is not buying an underperforming company. Berkshire Hathaway does not consider this to be a turnaround situation.

Warren Buffett is the classic “buy and hold” investor who is in it for the long term. Some of his portfolio companies, such as Geico and Fruit of the Loom, have been core investments for decades. That said, as a financial buyer, Buffett doesn’t typically pay up for deals. The lack of synergies makes it difficult.

Merger arbitrage resources

Other important merger spreads include the Freescale-NXP transaction. The merger of Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI) should close by the end of 2015. For a closer look at risk arbitrage investing, please refer to Merger arbitrage must-knows: A key guide for investors.

Investors who would like a broad exposure to the industrials space can look at the S&P SPDR Industrials ETF (XLI).


More From Market Realist