Bloomberg News

Buffett Says Berkshire Will Top $34 Billion Railroad Deal

May 07, 2012

The Burlington Northern deal was financed with cash and stock and has helped boost net income. Photographer: Nati Harnik/AP Photo

The Burlington Northern deal was financed with cash and stock and has helped boost net income. Photographer: Nati Harnik/AP Photo

Warren Buffett, who built Berkshire Hathaway Inc. (A:US) into a $200 billion company through stock picks and acquisitions, said his firm may top its largest deal, the 2010 purchase of railroad Burlington Northern Santa Fe.

“Berkshire will continue to grow,” Buffett, 81, said in an interview for Bloomberg Television’s “In the Loop” program with Betty Liu after the firm’s May 5 shareholders meeting in Omaha, Nebraska. “Someday, $34 billion will not be the limit.”

Record earnings at Berkshire’s largest units have helped build the company’s cash holdings (2FA:US) to $37.8 billion. Buffett told shareholders at the meeting that he recently passed on a deal valued at about $22 billion after failing to agree on price. The billionaire, who has kept the cash hoard above $20 billion to guarantee liquidity, said that such a deal would have meant divesting some securities he didn’t want to sell.

Buffett and Berkshire Vice Chairman Charles Munger, 88, took questions for five hours at Omaha’s CenturyLink Center on topics such as succession and U.S. politics, and companies including Wal-Mart Stores Inc. (WMT:US) He sketched out some of the roles he envisioned for the next generation of Berkshire leaders, who will oversee a $120 billion portfolio of stocks and bonds and allocate capital among more than 70 operating units.

Buffett said last month that he was diagnosed with stage 1 prostate cancer and that he would undergo radiation therapy starting in July. He said at the meeting that the diagnosis is a “minor event” and that he feels “terrific.” Some investors said they hope Buffett remains Berkshire’s chairman and chief executive officer for years and continues holding the annual meetings, which draw tens of thousands of people.

Munger’s Resentment

“I resent all this attention and sympathy Warren is getting,” Munger said in response to a question about Buffett’s health. “I probably have more prostate cancer than he does.”

Buffett’s roles will be divided when he’s no longer leading Berkshire. He has said that his son Howard, a company director, would guard the firm’s culture as non-executive chairman, while the board has picked his successor as CEO along with two backups. The firm hasn’t identified the candidates.

Oversight of the investment portfolio will fall to Ted Weschler and Todd Combs, former hedge-fund managers whom Buffett hired in the past two years. Berkshire hit a “home run” with both and may add another money manager to help, Buffett said. Weschler and Combs oversee $2.75 billion each.

Future Leaders

Risk management (2FA:US) will be among the responsibilities of the next CEO, Buffett said. The company’s future leaders are unlikely to have much of a derivatives book except for some positions used in operating subsidiaries, he said. Berkshire has more than $7 billion in liabilities on contracts it sold in 2006 and 2007 that are tied to global stock markets.

Overseeing what could happen to the company in worst-case scenarios is “a very important ability” that shouldn’t be delegated, Buffett said. “We’re not going to have an arts major in charge of Berkshire.”

The next CEO also will be counted on to make deals. Finding acquisitions (2FA:US) big enough to boost earnings power is one of the challenges Berkshire faces, Jay Gelb, an analyst at Barclays Plc, said in a note to clients last month. Gelb was among three analysts invited this year to ask questions of Buffett and Munger alongside shareholders and a panel of journalists.

The Burlington Northern deal was financed with cash and stock and has helped boost net income (2FA:US). The railroad contributed $701 million to first-quarter profit, up from $607 million a year earlier, as shipments of consumer goods and industrial products rose, Berkshire said in a May 4 regulatory filing.

‘I Love Acquisitions’

“I wish I could make a big acquisition, because I love acquisitions when we’ve got the money,” Buffett told Bloomberg Television. “If we can make a good deal tomorrow, whether it’s small or big, we’ll make it.”

Buffett told Bloomberg’s Liu that he would let women join the Augusta National Golf Club if he were in charge. The club, which holds golf’s annual Masters Tournament, has been criticized for its male-only policy. The promotion of Virginia “Ginni” Rometty to CEO of International Business Machines Corp., one of the tournament’s chief sponsors, drew attention to the issue. The Georgia club historically invites IBM’s top executive to be a member, including the four previous CEOs.

“I’m not telling the group at Augusta what to do, but if I were running the club I’d have plenty of women,” said Buffett, a member of Augusta. Berkshire is IBM’s biggest shareholder.

Citizens United

Buffett also fielded questions at the meeting about his support for President Barack Obama and his push for higher taxes on the wealthy. He said he wouldn’t donate to super political action committees, the interest groups made possible by the U.S. Supreme Court’s 2010 Citizens United ruling that removed limits on corporate and union election spending.

“I don’t want to see democracy go in that direction,” Buffett said. Supporters of both Obama and presumptive Republican nominee Mitt Romney have created super PACs to influence this year’s presidential election.

Some shareholders questioned Buffett about Berkshire stock, which has underperformed the Standard & Poor’s 500 Index in six of the last seven quarters. He said he may repurchase shares “on a big scale” if the price falls below 110 percent of book value, a measure of assets minus liabilities. At that point, Buffett said he would be certain that he was making money for shareholders who held onto their investment. Berkshire’s Class A shares closed May 4 at $121,950 each, or about 1.14 times book.

Bribery Allegations

Berkshire’s holding in Wal-Mart also drew a question. The New York Times reported last month that executives at the world’s biggest retailer bribed officials to speed expansion in Mexico. The U.S. Justice Department is investigating, people familiar with the matter have said. Berkshire owns 39 million shares, or more than 1 percent, of the Bentonville, Arkansas- based company.

While Wal-Mart may have botched how it dealt with bribery allegations and will have to divert management time to the investigation, the probe probably won’t have a long-term effect on the company’s financial strength (WMT:US), Buffett said.

“I don’t think the earning power of Wal-Mart five years from now will be materially affected by the outcome of this situation,” he said. “It may result in a significant fine, but I don’t think it changes the fundamental dynamic.”

David Tovar, a Wal-Mart spokesman, declined to comment. The company said in an April 21 statement that it has met voluntarily with the Justice Department and the Securities and Exchange Commission to discuss the case. The retailer also is enhancing its audit procedures and internal controls.

To contact the reporters on this story: Noah Buhayar in Omaha at nbuhayar@bloomberg.net; Margaret Collins in Omaha at mcollins45@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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