1 Company Berkshire Must Acquire

Sometimes it pays to step outside your comfort zone. On Wednesday, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) announced that it had paid $2.05 billion for the 20% of Israel-headquartered International Metalworking Companies it does not own already own, which values the company at $10.25 billion. Berkshire paid $4 billion for its initial 80% stake in 2006, for a $5 billion valuation, so this business, which commonly goes by the name of its largest subsidiary, Iscar, has been compounding value at a healthy rate, and Berkshire has already earned a solid return on its investment.

Better than Iscar
That's a fitting introduction to my acquisition recommendation for Berkshire CEO and billionaire investor Warren Buffett, because it shares a number of characteristics with Iscar:

  • It's a foreign company.
  • It serves manufacturing industries worldwide.
  • It's a leader in its area.

But however great a business Iscar may be (and it is genuinely great -- Warren Buffett and his partner Charlier Munger rave over it), I think Japan's Fanuc is superior. I first mentioned the company a little over two years ago, when I named it one of Japan's "world-beaters" (The total return on the shares from the publication date of the article is 27.9% in local currency terms, while the shares available on the over-the-counter market in the U.S. are flat over the same period.)

Headquartered at the base of Mount Fuji, Fanuc was spun out of conglomerate Fujitsu in 1972 and has become the leading supplier of numerical control systems for machine tools, whose devices enable automated factory floors.

With a deeply entrenched, dominant franchise, Fanuc is extremely profitable -- its operating margins are higher than Google's (if you want to learn more about its prospects, I recommend you read my colleague Nathan Parmalee's write-up, published when he chose it as a real money stock pick at the end of January.) The company has a superb culture of excellence, innovation, and continuous improvement (the Japanese concept of "kaizen"). In fact, the more one learns about Fanuc, the more it becomes clear this is an extremely unusual -- and high-performing -- organization.

An extraordinary business
Three quotes I lifted from a Businessweek magazine article and a Bloomberg online story, both from Nov. 2010, ought to give you some sense of that:

"They're expensive and have a monopolistic attitude; as a customer you feel powerless" --Philippe Selot, Senior sales manager at Swiss manufacturer Fritz Studer

"In a factory floor as big as a football field, you might see four people. The rest is robots reproducing themselves." --Morten Paulsen, Head of research, CLSA Japan

"The'yre the Microsoft you've never heard of. If Mount Fuji erupted and took them out, the world would stop running." --Scott Foster, BNP Paribas (Japan) [To be fair, I think the comparison with Microsoft understates the breadth of Fanuc's competitive moat.]

Go East, young man
During the press conference at the 2006 Berkshire Hathaway Annual Meeting, Vice-Chairman Charlie Munger told reporters that "the reason we could buy Iscar is because they are so smart. We weren't smart enough to find them, they were smart enough to find us," before adding: "There are a lot of companies in Asia with a similar culture as Iscar. I wouldn't be surprised to see a similar thing happen in Asia."

At a current market capitalization in excess of $29 billion, Fanuc would be Berkshire Hathaway's second-largest acquisition behind Burlington Northern Santa Fe. That might require it to raise some financing in order to complete the acquisition; however, given Fanuc's quality and its potential fit with Berkshire, it's a deal worth stretching for.

As Matthew McLennan, the manager of the Global, Overseas and U.S. Value funds at value-oriented manager First Eagle Funds, said in 2009: "[At Fanuc] you have an extremely experienced management team that has built a very strong culture and that takes a generational view in how they do things. The mission is for the company to live forever..." Sound familiar?

Thanks to the savvy of investing legend Warren Buffett, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy as well as important risks to watch out for. Click here now for instant access to Joe's take on Berkshire!


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