Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), the conglomerate led by billionaire investor Warren Buffett, is officially receiving a nice windfall of cash. The acquisition of agricultural giant Monsanto (NYSE:MON) by Germany's Bayer (OTC:BAYRY) in an all-cash deal is putting more than $2.4 billion back into Berkshire's coffers.
To be sure, Berkshire made a substantial amount of money on its Monsanto investment, so this is by no means a bad-news story. However, it does add to one of Berkshire's lingering problems: its massive stockpile of cash.
Bayer has officially purchased Monsanto
To make a long story short, German conglomerate Bayer has officially closed on its long-awaited purchase of agricultural giant Monsanto. The purchase offer was initially made by Bayer in May 2016, and terms were officially accepted by Monsanto in September of that same year, so this deal has been in the works for some time.
Under the terms of the all-cash deal, Bayer agreed to pay $128 per share for all of Monsanto's outstanding shares, valuing the company at about $66 billion, inclusive of debt. The deal finally closed on Thursday, June 8.
Berkshire's Monsanto investment is a solid win
Following the announcement of the deal in September 2016, the market didn't seem convinced that the deal would go through. And that's when Buffett pounced. He acquired about 8 million shares of Monsanto during the fourth quarter of 2016, when the stock was trading for a substantial discount to the deal price.
While we don't know the exact price Buffett (or one of his trusted stock pickers) paid for Berkshire's shares of Monsanto, the stock's maximum price during that quarter was about $106 per share, so it's fair to say that Buffett got in at significantly less than $128.
Over the next several quarters, Buffett gradually added to Berkshire's Monsanto stake as it began to look more and more likely that the deal would go through. In all, Berkshire ended up with just under 19 million shares of Monsanto by the end of 2018's first quarter, all of which were undoubtedly acquired for well under $128 apiece, as you can see in this chart.
Assuming Berkshire didn't unload any of its Monsanto stock after the deal was recently approved by regulators, the company is set to receive a cash injection of more than $2.4 billion.
Again, while we don't know how much Berkshire paid for its Monsanto shares, it's fair to say that its profit on the deal is likely in the hundreds of millions.
This adds to Berkshire's cash problem
While the Monsanto investment certainly worked out in Berkshire's favor, this isn't all good news. Specifically, it makes one of Berkshire's lingering problems even worse.
Over the past few years, generally high business valuations have produced a lack of attractive acquisition and investment options for Berkshire. Meanwhile, the company's subsidiaries and the dividend stocks in its portfolio continued to generate cash, and keep in mind that Berkshire doesn't regularly buy back shares, nor does it pay a dividend.
As a result, cash started to build up, and fast. By the end of 2017, Berkshire had about $116 billion in cash and equivalents on its balance sheet. Thanks primarily to a massive purchase of Apple stock in the first quarter of 2018, this has dropped to about $108 billion. However, Buffett prefers to keep $20 billion to $30 billion on hand, so this is still a lot of excess cash just sitting around.
Now, a massive stockpile of cash is certainly not the worst problem to have. It's certainly better than owing $116 billion that you can't figure out how to pay back. However, it's still a problem.
The problem is that this cash is sitting there earning little to no returns, instead of being invested and generating profits for shareholders. Buffett has said many times that he doesn't foresee a dividend being paid anytime soon, and Berkshire's stock is far more valuable than the buyback threshold set by the company's board, so Berkshire will need to find some investment opportunities if it wants to put its cash to work.
Where are Berkshire's deal opportunities?
The good news is that the first quarter of 2018 was the most promising in a long time in terms of investment opportunities. Stocks dropped considerably from their highs, and Berkshire felt confident in buying about 75 million more shares of Apple.
However, the "big deal" that Berkshire has been searching for since its cash started to accumulate remains elusive. Buffett and his right-hand man, Charlie Munger, have recently started to sound a little more optimistic than in recent quarters, but only time will tell if a big acquisition is in Berkshire's not-too-distant future.