Berkshire Hathaway (NYSE:BRK-A) (NYSE: BRK-B), the conglomerate led by billionaire investor Warren Buffett, has nearly $100 billion of cash on its balance sheet, and investors have been patiently waiting for the company to put some of this cash to work. Unfortunately, Berkshire's most recent plan to put a dent in its cash stockpile just came to an end. Here's what happened, and what it means to Berkshire's shareholders.
Buffett's failed bid for Oncor
In July, Berkshire Hathaway announced that it had agreed to acquire Texas-based power transmission company Oncor in a $9 billion transaction, which would allow Berkshire to grow its already-massive portfolio of utilities. More importantly, the transaction would finally allow Berkshire to put a significant amount of its growing cash hoard to work.
However, the deal faced headwinds from the start. Hedge fund Elliott Management, the largest creditor to Energy Future Holdings (parent company of Oncor), opposed the deal and had been considering a $9.3 billion offer for Oncor in order to outbid Buffett.
Just recently, Sempra Energy bid $9.45 billion for Oncor, and this caused Energy Future to pull out of the Berkshire deal altogether, sources familiar with the matter told CNBC.
Difficult to put cash to work
At the end of the second quarter, Berkshire had just shy of $100 billion in cash and equivalents on its balance sheet. Buffett has said that he likes to keep about $20 billion in cash at all times, so the current cash stockpile includes roughly $80 billion in cash just sitting on the sidelines and generating minimal returns for Berkshire and its shareholders.
While the Oncor acquisition wouldn't have solved Berkshire's cash-hoard problem, it would have certainly made a significant dent. Instead, Berkshire is left with a growing cash stockpile that has likely surpassed the nine-figure mark by the time you're reading this.
With the stock market hovering near all-time highs, Berkshire has struggled to find attractive ways to put its cash to work, especially when it comes to larger investments that would make a meaningful dent in the stockpile of cash.
Since the company acquired Precision Castparts for $32 billion in a deal announced in August 2015, the company has had difficulty finding any large deals. In fact, all Berkshire has used its cash for this year has been a few stock purchases, such as its recently acquired $377 million stake in real estate investment trust Store Capital. This may sound like a major investment to you and me, but it represents less than 0.4% of Berkshire's available cash.
What it means for Berkshire and its shareholders
Berkshire would love to find a major purchase to spend its cash hoard on, but Buffett will only do so if he feels that the value is compelling.
Buffett has acknowledged that Berkshire has struggled when it comes to putting its cash to work, and has said that if the company continues to generate more cash than it can effectively use, it may need to find other ways to use its cash. This could potentially include buying back shares at a valuation that's somewhat higher than Buffett has historically been comfortable with, or even paying a dividend for the first time since 1967.
As a longtime Berkshire shareholder myself, I hope that Buffett and his team are able to find a big acquisition opportunity, or an opportunity to buy billions' worth of common stock at attractive prices. Having said that, buybacks and dividends are certainly better options than letting billions of dollars in cash sit around generating virtually nothing. The bottom line is that the failed Oncor acquisition further increases the level of urgency surrounding Berkshire's need to figure out ways to deploy its capital before its mountain of cash gets too much bigger.