Buffett: $24 Billion Gain ‘Subpar’; Berkshire Boss Says He Is Donning His ‘Safari Outfit’ as He Continues the Hunt for Big Acquisitions

Updated March 1, 2013, 6:58 p.m. ET

Buffett: $24 Billion Gain ‘Subpar’

Berkshire Boss Says He Is Donning His ‘Safari Outfit’ as He Continues the Hunt for Big Acquisitions

By ANUPREETA DAS And ERIK HOLM

Warren Buffett bemoaned Berkshire Hathaway Inc.’s BRKB -0.11% failure to land a major acquisition during 2012 to use its swelling cash hoard, and in his annual letter to shareholders called his company’s performance “subpar” despite a $24 billion increase in its net worth. The value of the Omaha, Neb., company rose 14% in 2012, Berkshire said Friday, compared with a 16% total return in the Standard & Poor 500-stock index, including dividends. But Berkshire’s ballooning size means that keeping up with the market continues to get tougher, as Mr. Buffett has long warned it would.

“When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar,” Mr. Buffett, Berkshire’s chairman and chief executive, said. “But subpar it was.” The lagging performance is just the company’s ninth in the 48 years that Mr. Buffett has steered the company, but the third in four years. If the stock market continues to advance in 2013, it could jeopardize his streak of beating the S&P on a rolling five-year basis, as Mr. Buffett said Berkshire’s relative performance is stronger when the market is down or flat.

Not landing a large deal in 2012 was another disappointment, Mr. Buffett said: “I pursued a couple of elephants, but came up empty-handed.” Two years ago, he said he was on the prowl for big deals as a way to boost returns on Berkshire’s billions of dollars in cash. At the time, Mr. Buffett said, “Our elephant gun has been reloaded, and my trigger finger is itchy.”

That message sent deal makers scurrying to identify potential “elephants,” or companies that fit Berkshire’s acquisition criteria of profitability and sound management, and also are large enough to increase the company’s overall book value, a measure of worth.

Mr. Buffett said he studied a couple of opportunities, which he didn’t name. But the planned $23.4 billion purchase with Brazilian buyout firm 3G Capital of H.J. Heinz Co., HNZ +0.06% announced last month—Berkshire is putting up $12 billion—is the biggest deal the billionaire investor has struck since the 2010 purchase of railroad operator Burlington Northern Santa Fe Corp. for $26 billion. There have been smaller deals, including “bolt-on” purchases by Berkshire subsidiaries for a total of $2.3 billion, Mr. Buffett said.

Still, small deals don’t move the needle for Berkshire, which had $47 billion in cash at the end of 2012. Four of the conglomerate’s biggest noninsurance subsidiaries—Burlington Northern, Lubrizol, Iscar and Marmon Group—entered the Berkshire fold through acquisitions in recent years, and posted $10.1 billion in 2012 pretax earnings, up $600 million from a year ago.

Mr. Buffett said he and Vice Chairman Charlie Munger continue to hunt for big deals. “Charlie and I have again donned our safari outfits and resumed our search for elephants,” he said.

Berkshire has been busy acquiring newspapers. In the past 15 months, the company bought 28 daily newspapers for $344 million. These deals don’t fit Berkshire’s size requirements, but Mr. Buffett said he and Mr. Munger love papers and will continue to buy them “if their economics make sense.”

The company also boosted its stake in major investments American Express Co.,AXP +0.35% Coca-Cola Co., KO -0.05% International Business Machines Corp.IBM +1.04% and Wells Fargo WFC +0.88% & Co., and expects to increase those stakes further in the future, Mr. Buffett said.

He didn’t delve into succession plans, but said the two investment managers Berkshire has hired in recent years, Todd Combs and Ted Weschler, outperformed the S&P 500 by double digits in 2012.

“We hit the jackpot with these two,” Mr. Buffett wrote.

Berkshire Hathaway reported net income of $14.8 billion for 2012, up 45% from a year earlier and driven largely by improved underwriting results at its insurance units and $1.28 billion in derivative gains.

In the letter, Mr. Buffett also chided chief executives around the nation who declined to invest for the future, citing economic uncertainty, and with tongue in cheek urged them to consider selling out to Berkshire.

“If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire,” he said. “Let us unburden you.”