December 8, 2023

DealBook: Amid Scandal, Guessing Game Builds Over Buffett’s Next Deal

Warren E. BuffettPrashanth Vishwanthan/Bloomberg News The Sokol affair may have shaken Warren E. Buffett, but it is unlikely to deter his deal-making.

Among the questions nagging at investors making the pilgrimage to Omaha this weekend to attend the annual meeting of Berkshire Hathaway will be this: Will the outcry over David L. Sokol affect Warren E. Buffett’s deal machine?

Only two months ago, Berkshire appeared to be riding high. The conglomerate posted a 61 percent gain in annual profit for last year. Perhaps most notably, Mr. Buffett wrote in his annual letter to shareholders that he was again on the hunt.

“We’re prepared,” he wrote. “Our elephant gun has been reloaded, and my trigger finger is itchy.”

In March, Mr. Buffett appeared to at least partly sate that itch when he agreed to buy the chemicals manufacturer Lubrizol for $9 billion in cash.

Yet that deal has now trapped Berkshire in controversy. Mr. Sokol, the chairman of MidAmerican Energy Holdings, a unit of Berkshire Hathaway, resigned after disclosures that he had bought shares in Lubrizol shortly before recommending the company to Mr. Buffett as a takeover target. Initially hesitant, Mr. Buffett eventually agreed to the deal, the third-largest purchase in his career.

On Wednesday, the audit committee of Berkshire’s board condemned Mr. Sokol’s actions as violations of the company’s insider stock-trading policy and hinted that the company might sue Mr. Sokol, a onetime star manager. The Securities and Exchange Commission is looking into Mr. Sokol’s trades, people briefed on the matter have said previously.

It is unclear whether the Sokol affair will have lasting implications for Berkshire. Some Buffett-watchers say that the biggest damage may be to the investor’s reputation.

“Buffett was on an unrealistically high pedestal to begin with,” Alice Schroeder, the author of an authorized biography of Mr. Buffett, said. “A lot of Berkshire’s business advantage came from that mystique.”

But it is unlikely to deter Berkshire from its takeover safari.

“I don’t think if there are any deals on the horizon that this is going to cause Buffett to pause in the least,” said Michael Yoshikami, the chairman and chief executive of YCMNET Advisors, a Berkshire shareholder.

The fundamentals for why Berkshire must pursue even more acquisitions have not changed. The company generated $17.9 billion in cash from its operations last year, and currently has more than $38 billion to spend.

And its underlying businesses, apart from its commercial insurance operations, have rebounded well from the recession, said Meyer Shields, an analyst at Stifel Nicolaus.

“I expect no changes and that we may see Berkshire do a $10 billion deal in the next 12 months,” he said.

And despite the reputational damage done to the Buffett brand, the executive still exerts a magnetic charm and has a strongly performing business that many companies still want to join, Ms. Schroeder said.

Just what exactly Berkshire will buy next remains a parlor game among analysts and investors.

Mr. Buffett has hewed to a fairly rigid set of criteria for potential deal targets, including consistently high earnings, little debt and strong management teams in place.

Mr. Buffett has long regarded his big investments as crucial to continuing Berkshire’s strong financial performance. He singled out his $26 billion purchase of Burlington Northern as a big contributor to Berkshire’s bottom line. The deal appeared likely to raise Berkshire’s earning power by nearly 40 percent before taxes, and the cash needed to strike the deal was quickly replenished.

“The economics of this transaction have turned out very well,” he wrote in this year’s investor letter.

While Mr. Buffett most recent shareholder letter sang the praises of the United States — he described the country as ripe with an abundance of opportunity — many observers say that his next trophy may well be abroad.

Mr. Yoshikami noted that many of Berkshire’s recent big deals, including those for Lubrizol, Burlington Northern and the industrial conglomerate Marmon Holdings, had been largely for developed companies with high cash flow.

A logical next step may be in finding a high-growth but stable foreign company, as Berkshire did in 2008 when it acquired a 10 percent stake in the Chinese auto parts maker BYD, Mr. Yoshikami said.

That opportunity may lie in a growing economy like India, which Mr. Buffett visited last month.

“I’ve been dropping my phone number around as I cover the city,” he told reporters then. “I hope someone rings me Monday morning with good news.”

Berkshire AcquisitionsThe New York Times

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