Buffett’s $40 Billion Cash Pile Provides Acquisition Fuel

Buffett’s $40 Billion Cash Pile Provides Acquisition Fuel

Warren Buffett, who aims to have $20 billion in cash at his Berkshire Hathaway Inc. (BRK/A), isn’t investing fast enough to keep money from piling up. Berkshire will post a $4.3 billion third-quarter profit, according to an estimate from Barclays Plc, adding to a cash hoard of $35.7 billion at the end of June. Buffett also got back $4.4 billion this month that was lent to help Mars Inc. buy Wm. Wrigley Jr. Co. in 2008.Even in a year in which the company has struck some of its largest deals and accelerated capital spending, Buffett still needs to find acquisitions. Omaha, Nebraska-based Berkshire has already invested $12.3 billion on a takeover of HJ Heinz Co., committed $5.6 billion to buy a Nevada electric utility and made smaller purchases through subsidiaries since Dec. 31.

“It’s a high-class problem,” said Cliff Gallant, an analyst at Nomura Holdings Inc. “The year’s not up. I wouldn’t be surprised to see another deal of some sort.”

Buffett, Berkshire’s chairman and chief executive officer for more than four decades, has said he likes to keep $20 billion on hand should the reinsurance operations need to pay large claims. Having additional cash allows him to make big investments when others are fearful.

Buffett’s 2008 deals with companies including Mars, Dow Chemical Co., Goldman Sachs Group Inc. (GS) and General Electric Co. allowed him to put large amounts of money to work, earn high interest rates and, in some cases, get warrants to buy equity.

‘Too Much’

The cash pile climbed as high as $49.1 billion on March 31, before falling in the second quarter after the Heinz deal. Berkshire had about $40 billion on hand, Buffett told CNBC on Oct. 16. He didn’t return a message seeking comment about his plans for the funds.

“It’s too much any time we have more than $20 billion,” he said in a May interview with Bloomberg Television’s Betty Liu. “But that doesn’t mean we’re going to spend it just because we have it.”

Still, keeping ample liquidity has come at a price. Most of Berkshire’s cash is in Treasuries (USGG10YR), which have generated little interest income as the Federal Reserve kept rates low to help stimulate the economy.

“The $20 billion-plus of cash-equivalent assets that we customarily hold is earning a pittance at present,” Buffett wrote in a 2010 letter to investors. “But we sleep well.”

Barclays estimated that Berkshire’s earnings will climb about 9 percent in the three months ended Sept. 30 from a year earlier. The company will benefit from higher profit at railroad Burlington Northern Santa Fe and insurance units, analysts led by Jay Gelb wrote in an Oct. 2 report. Buffett may announce results as soon as tomorrow.

Berkshire’s Position

Berkshire has enough cash for a $15 billion acquisition, counting proceeds from Mars and commitments to buy businesses, the analysts wrote in a note on Oct. 4. Since then, Berkshire’s Marmon unit agreed to buy a beverage dispenser business from IMI Plc for $1.1 billion.

Buffett, 83, has passed on some opportunities to draw down his cash pile this year. Deals with Goldman Sachs and GE in 2008 enabled him to buy a combined $8 billion in the companies’ stock at below-market prices. Instead, he settled the contracts this month in cashless transactions that gave him smaller stakes.

Exercising his full option to buy Goldman Sachs shares would have made the holding one of the largest in Berkshire’s stock portfolio, which was valued at more than $100 billion at the end of June. Buffett has said he’d rather focus on his biggest equity investments: Wells Fargo & Co., International Business Machines Corp., American Express Co. (AXP) and Coca-Cola Co.

Big Four

“Otherwise, we would have been putting a great many billions of dollars in,” he said of Goldman Sachs in the interview with Liu. “That’s not an investment that we anticipate being in our big four, but it’s an investment we’re happy to have.”

The wind-down of Buffett’s crisis-era wagers has put a dent in investment income. Mars repaid bonds that carried an 11.45 percent coupon, and Goldman Sachs and GE each paid 10 percent dividends on the funds Buffett provided. Both companies redeemed Berkshire’s stake in 2011.

The Heinz purchase replaces some of that revenue. In addition to getting half the equity in the world’s largest ketchup maker, Berkshire invested $8 billion to get preferred shares that pay $720 million in dividends a year.

Berkshire Class A shares had gained 30 percent this year through yesterday in New York. That outpaces the 24 percent advance by the Standard & Poor’s 500 Index.

Buffett’s firm has more than 80 units that operate airplanes and power plants, manufacture bricks and chemicals, and sell products from chocolate to running shoes. Together, they helped generate a record $9.4 billion profit in the first six months of the year.

“The cash-flow generation at Berkshire right now is immense,” said Meyer Shields, an analyst at Keefe, Bruyette & Woods. “Eventually, there will be something to buy, and he’ll have the cash on hand to buy it.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.