Berkshire Hathaway (BRK-B) announced a $10 billion investment in Occidental Petroleum (OXY) amid its hostile bid for Anadarko Petroleum (APC). Chevron (CVX) is also in the race to acquire Anadarko Petroleum.
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Berkshire Hathaway, which has an enviable track record compared to the S&P 500 (SPY), is underperforming the markets this year. The company’s outperformance compared to the S&P 500 has narrowed this century. The recent underperformance could be due to Berkshire Hathaway’s massive cash pile. Since markets soared in the first quarter, Berkshire Hathaway likely held onto its cash pile. We’ll get more details on Berkshire Hathaway’s first-quarter buying activity after the company files its 13F.
While Berkshire Hathaway’s chairman, Warren Buffett, is looking at a major acquisition, he also discussed the lack of such opportunities in this year’s annual letter. There aren’t many privately held companies with a scale that could move the needle for Berkshire Hathaway given its market cap of over $500 billion and its cash and cash equivalents of more than $110 billion. Buffett said in an interview with Financial Times that he refrains from “buying companies that need help.”
Publicly traded securities
As for publicly traded securities, Berkshire Hathaway faces tough competition from private equity funds. In the interview, Buffett pointed to excessive leverage used by private equity funds and said, “It’s very, very, very hard to make deals in a world where you’ve got $1tn-plus of money.”
Since Buffett has been against paying dividends and Berkshire Hathaway hasn’t really splurged money on buybacks, transactions like Occidental Petroleum appear to be the best way to deploy its cash. The deal offers a healthy dividend and the possibility to participate in future stock price appreciation.