With a cash pile of over $100 billion sitting on its balance sheet, Berkshire Hathaway is under increasing pressure to put it to work by acquiring companies and boosting growth. The company’s last major acquisition was Precision Castaparts for over $30 billion in 2015, but things have more or less dried up since then, much to Buffett’s chagrin – he said publicly at the shareholders’ meeting in May of this year that he couldn’t “come back in 3 years and say they have $150 billion in cash[1].” Given his legendary status as a shrewd acquisition artist and his incredible track record in execution, these consecutive high profile failures seem odd.
A good amount of what went wrong has to do with the current environment in the M&A market. Valuations are still strikingly high, which means buyers must expect to pay much higher premiums, even for targets in distress like Oncor. This, of course, directly conflicts with both Berkshire’s desire to bid what they deem fair for a company’s intrinsic value and their ability to pay less for a target due to their caché.
The other side of this, of course, is that the other buyers in the market are becoming increasingly aggressive. As cash piles up at PE firms and hedge funds, their ability to produce returns for their investors declines and, as a result, they face rising pressure to deploy their cash. While Berkshire Hathaway feels a similar pressure, they are much less beholden to act on it than a private equity fund would be, given that they do not charge fees to their stockholders. As a result, these investment firms end up helping to push valuations even higher as they become willing to accept lower returns and be more aggressive in a more challenging environment. Elliot Management’s blocking of the Berkshire bid by buying impaired debt to prevent the offer from being accepted embodies this – their aggressive tactics completely derailed Buffett’s purchase.
When Simplicity Isn’t a Virtue
Berkshire’s negotiation style also contributed to the deal falling through, namely, in that they tend not to negotiate. It’s extremely rare for Warren Buffett to raise an offer for a company once it’s been submitted and this was no exception – he stuck to his guns on the $9 billion offer value, even as competing offers at higher prices came through. Berkshire’s bids also tend to be very simply structured and straightforward, and they took this approach with Oncor, offering $9 billion in cash. They did include a ring-fencing agreement to help appease regulators and creditors but this is still a very straightforward clause, especially given that Oncor’s sale was borne from bankruptcy proceedings. Unfortunately, this sort of simplicity can be seen as undervaluing a business, as many provisions and complexities imply higher valuations. This is exactly what Elliot Management claimed – that Berkshire’s bid didn’t represent fair value.
There was also some more technical work at play that caused the deal to fall apart. Oncor’s CEO said that Berkshire was their preferred buyer, so it’s clear that Elliott Management had to maneuver deftly to block the purchase from going through. This was done reasonably cheaply, by buying $60 million worth of impaired debt and claiming with all other creditors that they would not approve of the Berkshire deal. Since bankruptcy courts generally need at least one group of unsecured creditors to approve such a transaction, by buying this debt, Elliott Management could force their own solution without paying a substantial price. Likely this is at least partly a result of Berkshire’s relative inexperience with bankruptcy proceedings compared to Elliott’s, who has made quite a name for themselves in this space. Really, though, this goes back to the simplicity of bids that Berkshire makes, which can be something of a double-edged sword. While it didn’t pay off in this case, often their approach is preferred by sellers, who know they aren’t going to get fleeced through complex transactional structures. Regulatory bodies are more at ease with this style, too, as they are more easily able to measure a given bid against their required rules for a deal.
Staying disciplined is key for all investors, and that includes those in the M&A space. After all, it’s easy to get sucked into a bidding war where numbers are driven more by emotional biases instead of the numbers and analytical processes. In this respect, Warren Buffett was successful in sticking to his philosophy as an investor, as his disciplined approach allowed him to step away from a deal that he no longer felt was worth it. While there have been many calls for the Oracle of Omaha to update his techniques, his simple, straightforward approach builds goodwill in the corporate space in a way that highly complex and potentially litigious deals do not. This is certainly not to say that there isn’t room for both, but a large conglomerate like Berkshire has different goals and objectives when buying a company than a PE fund does. It’s up to you, as dealmakers, to determine what style and tactics are best suited in any given deal.
