Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) ended 2017 with about $116 billion in cash that it would love to spend. However, a flurry of merger and acquisitions (M&A) activity caused by a strong economy and cheap debt has made it difficult to put this money to work.
A full transcript follows the video.
This video was recorded on Feb. 26, 2018.
Michael Douglass: Another big point that Buffett noted was, Berkshire Hathaway now has $116 billion in cash. And that is, in any world, a lot of money, but for Berkshire, it's a really big amount of money. And what's interesting about this is, this massive cash pile has accrued despite the fact that Berkshire actually did not run an underwriting profit last year. Now, this is the first time in a long time they hadn't, but because of various natural disasters, which you've probably been hearing about in the news over the past year, Berkshire actually didn't achieve an underwriting profit for the first time in a long time.
Matt Frankel: Yeah, Berkshire is one of the more profitable insurance operations, I would say. And this is what I was talking about with the reinsurance business, how it's more of a longtail payout. Most years you're going to do really well, but then, on occasion, you're going to have a lot of natural disasters that affect other insurance companies a whole lot, and then you're going to wind up having to pay out more money.
But, on the topic of cash, Berkshire accumulated an additional $7 billion worth of cash in the fourth quarter alone. They simply cannot find any way to put it to work that Buffett would approve of. Buffett does not like paying dividends. Even though he mentioned it about a year ago, it turns out that might have just been out of frustration. He really has no interest in paying a dividend. Share buybacks are another possibility, but really, Berkshire wants to buy more companies, or invest in more common stocks, they just can't find attractive ways to put over $100 billion to work. Buffett likes to keep about $20 billion in reserves at all times, so realistically they would spend a little over $90 billion on a deal if they could find one, but he just can't find anything cheap enough.
Douglass: And what's really interesting about this to me is, last year it was the largest year for mergers and acquisitions. According to, I think it was McKinsey -- no, Thomson Reuters, about $3.5 trillion in deals last year, and yet Buffett couldn't find anything that he wanted, or anything really big that he wanted. There were some smaller bolt-on acquisitions. Again, that sort of stuff is in the letter. But, he really wasn't able to do the big deals he was looking for.
And it's interesting to me because Buffett really dedicated about a page of his letter taking to task people for the way they've made mergers and acquisitions recently. One of them being, he said basically, "There's been a lot of cheap and easy debt, and that's one of the reasons there's been all this M&A activity. Me and Charlie Munger think it's really, really dumb to borrow what you don't have to buy something that you don't need." And I'm paraphrasing him very closely, that pretty close to a direct quote. He's basically like, "What are you doing? Why are you levering up your balance sheet for something that's only going to be accretive because you're levering so hard with debt?"
Frankel: Yeah, he brought up this concept of synergies, which are often used by companies to help justify M&A activity. And to be fair, in a lot of cases, it makes a lot of sense. If you're a retailer and you have one management team overseeing 100 stores, and another company has another management team overseeing 100 stores, and you combine that into one management company overseeing 200 stores, obviously there's some cost savings to be had there.
But Buffett's point is, the concept of synergies is used to justify deals that otherwise don't make sense, which is what we're seeing a lot today. Buffett said they've evaluated a lot of deals over the past year, but none of them made good financial sense. And Michael just mentioned that M&A activity has been through the roof. A lot of the reason that companies are justifying this is, "The cost savings will get from this, we're going to work out the kinks with this," there's all these synergies that are expected. Buffett says, when they evaluate deals, first of all, they don't even consider synergies. Second of all, he said they don't wind up finding any, normally, after they do complete a deal. So, Buffett takes a different perspective on evaluating a deal than most companies do, which is why Berkshire has had such a tough time coming up with acquisitions they could justify.
Douglass: And it's interesting, because when I look at Buffett's commentary, my immediate thought was, what does the data say? And I found a McKinsey report that showed that about 40% of mergers and acquisitions realized less than 90% of the synergies that they had claimed beforehand. And that tells me that there's probably a lot that he's talking about here, particularly because when I look at mergers and acquisitions activity, a lot of the small ones will either work out or fail cheaply. If you're a $20 billion company and you bought another company for $1 billion and it doesn't work out, it's not necessarily the end of the world. But if you do a merger of equals between two $80 billion companies and that does not generate the expected synergies, and you end up cannibalizing each other, or creating dis-synergies, even, then that can be a lot more dangerous.
I have to say, the more I look at the idea of synergies, the more skeptical I become of it. Just covering major deals in the last three or four years, I've seen a lot of claims for synergies, and it's usually been to help cement a deal that I wasn't really that thrilled about in the first place. So, for me at least, Buffett's commentary rang very true. And it's definitely a bigger concern for me on my radar now than it was in the past.
Frankel: Definitely. It's especially true if the acquiring business takes on a lot of debt, as you mentioned, in order to fund the acquisition. Then these synergies, or lack thereof, can be very dangerous, especially if that was used to justify the deal in the first place.
Douglass: And it's one of those things where you have to ask yourself the question -- when the market's tacking left and Buffett's tacking right, who are you going to believe? And in general, Buffett has a real history of beating the market. He has a real history of running a business much better than almost anybody else. So, when he says, "That seems kind of not prudent," I'm inclined to give him the benefit of the doubt.
Frankel: Yeah. He's not only beat the market, but he's done so in a way that most people consider boring and safe. So, it's kind of the best of both worlds. He's not taken out a whole lot of risk, but he's managed to beat all the people who have taken on all the risk.