In typical fashion, Warren Buffett made some big acquisitions last week, and he made them quickly. The ever-patient Buffett can wait years to do a deal, but when he finds something he likes, he needs only days, sometimes just minutes, to wrap things up. This past week was no exception.
Berkshire's biggest non-insurance deal
On Christmas Day, Buffett announced that Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) was buying 60% of industrial conglomerate Marmon for $4.5 billion. Over the next several years, Buffett is expected to acquire the remaining 40% at a yet to be determined figure based on future operating performance. As is often the case with most of Buffett's deals, this "transaction was done just the way Jay [Pritzker] would have liked it to be done -- no consultants or studies. I am pleased that over the next five to six years, we will be partnering and working ... in continuing to build Marmon."
Marmon's stable of some 125 various manufacturing and service businesses such as cable, plumbing, and industrial products epitomizes the type of boring, predictable businesses that Buffett loves to own. According to Buffett, this deal is a "very large bet on America over a long period of time."
Doing what he does best
Days after the Marmon deal, Buffett announced that Berkshire was entering the bond insurance business upon receipt of a license from the state of New York. Always disciplined, Buffett does not intend to insure the bonds of structured mortgages, activities that are now jeopardizing the AAA ratings of MBIA (NYSE: MBI ) and Ambac (NYSE: ABK ) . Instead, Buffett is using the recent turmoil to take advantage of the attractive bond insurance rates. And given that it's a near certainty that Berkshire's bond insurance business will have a rock-solid triple-A rating, Berkshire will be able to price some very attractive policies.
Rather than stray into exotic insurance projects, Buffett plans to offer the bond insurance to cities and counties and states that issue bonds to finance infrastructure projects. According to Buffett, he "won't stray" from insuring municipal bond issues. This is a very similar approach to Berkshire's recent $2 billion purchase of TXU bonds. According to Buffett, the TXU investment was a bet on the utility industry. Similarly, Buffett's bond insurance venture, made possible by the compelling rates, is a bet on the municipal infrastructure market. Buffett has experience investing in the bonds underlying municipal projects, and they're usually safer instruments backed by the revenues of the issuing municipality.
The current plans call for bond insurance in New York, possibly followed by California and Texas. Ultimately, Berkshire plans to seek licenses in other states. Yet Buffett won't stray. He has no plans to insure bonds covering derivatives or any financially backed product. Buffett is also willing to bet big, as he often does, when the opportunity arises. If the opportunities for municipal bond insurance continue to remain attractive, Buffett has stated that this could be a very big capital investment -- one that "could move the needle" at Berkshire.
Steady wins the race
Buffett's activities in late 2006 and 2007 suggest that he's very optimistic on the U.S. over a very long period of time. For decades, Buffett has avoided capital-intensive business with very low returns on capital. He changed his tune when he bought a chunk of railroad operator Burlington Northern Santa Fe (NYSE: BNI ) . The railroads, after decades of very unattractive returns on capital, are starting to generate returns above the cost of capital. Increasingly high oil prices also make the economics of rail transport much more attractive when compared to other modes of transportation.
Pipes, wires, and railroads are not the glamorous businesses of the day and won't yield the Google (Nasdaq: GOOG ) gratification that all investors certainly hope for. Yet they are the types of businesses that can stay steady for decades without any significant intrusion from innovative technologies. For a whale like Berkshire, these options provide a solid long-term bet.
Further related Foolishness:
- The Death of Berkshire Hathaway?
- E*Trade Bailout Signals Troubles Ahead
- Oops! The Worst Predictions for 2007