Warren Buffett is always on the hunt for potential acquisitions. His investment vehicle, Berkshire Hathaway, ended the latest quarter with nearly $100 billion in cash and equivalents on the books. This gives Buffett a lot of investment capital for potential deals.
We know Buffett is looking for deals. Berkshire was part of the team that put together the failed $142 billion Kraft-Unilever attempt earlier this year. More recently, Berkshire Hathaway Energy, a subsidiary of Berkshire Hathaway, announced a definitive merger agreement with Energy Future Holdings Corp. which will ultimately result in the acquisition of Oncor, an energy delivery company serving approximately 10 million Texans.
The Oncor deal is valued at $9 billion. Like many of Buffett’s deals, it is an all cash transaction. This deal demonstrates Buffett is a potential buyer. As investors, the question is what his next deal might be.
What Buffett Wants
We know a great deal about what Buffett looks for in a potential acquisition. We know that because Buffett has long included his acquisition criteria in Berkshire’s annual reports. Now, he has dedicated a page on his web site to the criteria.
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These criteria can be quantified and used to screen all publicly traded companies for potential acquisition candidates. Researchers with FactSet used their global stock market database to do this. Recognizing that Buffett needs large deals, they made some changes.
While Berkshire set a minimum size of $75 million of pretax earnings, they increased the lower limit to $500 million. Based on industry average ratios of pretax income to market capitalization, this resulted in a company size between $25 billion and $200 billion. These seem like reasonable targets for Buffett given his available cash.
To meet the second criteria, they searched for companies that have maintained a price to earnings (P/E) ratio of at least 15 for each of the prior three years. This indicates the company has demonstrated consistent earning power.
The third requirement is met by companies with a return on equity (ROE) of at least 8% for the prior three years. The maximum debt to equity ratio was set at 33%.
To provide management in place, only companies where the average tenure of management is at least five years are considered. A simple business is defined as one that has no more than five subindustries, based on the FactSet Revere Industry Classification System (RBICS).
Possible Acquisition Candidates
The FactSet database includes 83,000 public companies. The initial screen resulted in a list of just 12 companies that meet all criteria.
Some of these had high valuations and are excluded. That leaves eight.
- Henkel AG & Co. KGaA (Other OTC: HENOY) engages in laundry and home care, beauty care, and adhesive technology businesses worldwide. The Laundry and Home Care segment offers specialty detergents, laundry performance enhancers and various other household cleaning products under the Persil, Purex, and Pril brand names. The Beauty Care segment focuses on hair, skin, and oral care products under the Schwarzkopf, Dial, and Syoss brand names. The Adhesive Technolgies segment offers industrial and specialty adhesives, sealants, and functional coatings for packaging and consumer goods, transport and metal business, general industry, and electronics, as well as consumers, craftsmen, and building operators. This segment markets its products primarily under the Loctite, Technomelt, and Bonderite brand names.
- Adidas AG (Other OTC: ADDYY) designs, develops, produces, and markets athletic and sports lifestyle products worldwide. The company is involved in wholesale, retail, and e-commerce business activities related to the distribution of adidas and Reebok products to retail and end customers. As of 2016, the company employed more than 60,000 people in over 160 countries and produced more than 840 million product units with €19 billion in general sales. The company offers footwear; apparel; and hardware, under the Adidas, Reebok, adidas Golf, and CCM brands. Additionally, the company is involved in the business activities of the label Y-3, Porsche Design Sport, and Five Ten brands; provision of ecosystem for tracking and managing health and fitness data; and the retail activities of the adidas neo label. Adidas is headquartered in Germany and trades in the US as an ADR.
- SAP SE (NYSE: SAP) operates as an enterprise application software and database company worldwide. The company offers SAP HANA and SAP S/4HANA, which are in-memory computing platforms that store and process data, and eliminate the maintenance of separate legacy systems and siloed data. The company also provides SAP Cloud Platform, an in-memory platform-as-a-service to build, run, and extend business applications; SAP BusinessObjects Cloud, a cloud analytics solution; SAP Digital Boardroom, a solution to access company data in real time; and SAP Leonardo, a solution to digitize manufacturing, logistics, and asset management processes, as well as maintenance, consulting, and training services.
- NIKE, Inc. (NYSE: NKE) designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men’s training, women’s training, action sports, sportswear, and golf. NIKE also offers products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. NIKE is also known for its sports apparel, performance equipment, and various plastic products and athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks.
- L’Oréal S.A. (OTHER OTC: LRLCY) manufactures and sells cosmetic products worldwide. The company operates through Consumer Products, Active Cosmetics, L’Oréal Luxe, and Professional Products divisions. The company also offers skincare and haircare products, toiletries, deodorants, make-up products, and perfumes. Its products are under the Lancôme, Giorgio Armani, Yves Saint Laurent Beauté, Biotherm, Kiehl’s, Ralph Lauren, Shu Uemura, Cacharel, Helena Rubinstein, Clarisonic, Diesel, Viktor&Rolf, Yue Sai, Maison Margiela, Urban Decay, Guy Laroche, Paloma Picasso, Proenza Schouler, Vichy, La Roche-Posay, SkinCeuticals, Roger&Gallet, Sanoflore, LOréal Paris, Garnier, Maybelline New York, African Beauty, Essie, NYX Professional MakeUp, The Body Shop, LOréal Professionnel, Kérastase, Redken, Matrix, Pureology, Shu Uemura Art of Hair, Mizani, Decleor, and Carita brand names. L’Oréal is headquartered in France and trades as an ADR in the US.
- Cognizant Technology Solutions Corporation (Nasdaq: CTSH) provides information technology (IT), operations and technology consulting, infrastructure, and business process services worldwide. The company operates through four segments: Financial Services, Healthcare, Manufacturing/Retail/Logistics, and Other. The company serves various industries, including banking and insurance; healthcare and life sciences; manufacturing and logistics; retail, travel, and hospitality; consumer goods; communications; information, media, and entertainment; and technology.
- BlackRock, Inc. (NYSE: BLK) is a publicly owned investment manager. The firm primarily provides its services to institutional, intermediary, and individual investors including corporate, public, union, and industry pension plans, insurance companies, third-party mutual funds, endowments, public institutions, governments, foundations, charities, sovereign wealth funds, corporations, official institutions, and banks. It also provides global risk management and advisory services. The company offers 135 investment teams in 30 countries.
- Public Storage (NYSE: PSA) is an equity real estate investment trust that invests in real estate markets of United States and Europe. The firm acquires, develops, owns, and operates self-storage facilities which offer storage spaces for lease on a month-to-month basis, for personal and business use. It also reinsures policies against losses to goods stored by customers in self-storage facilities, and sell merchandise, primarily locks and cardboard boxes.
Buffett is an outspoken critic of excessive executive compensation. This can be difficult to define but three companies on the list may not be suitable for Buffett based on how much they pay their CEOs. The CEO of Public Storage received $11.2 million last year. BlackRock paid its CEO $25.5 million last year according to SEC filings. Nike was even more generous, paying its CEO $47.6 million.