Last week was a huge one for Wall Street, as stock market benchmarks managed to rally despite all the pessimism across the globe. Even in the face of war in Ukraine, high inflation, and a persistent rise in COVID-19 cases in Europe and Asia that could reverse the recent fall in case counts in the U.S., investors believed in the long-term resiliency of the stock market. Even after a big gain, markets were solid on Monday morning as of 7:30 a.m. ET. Futures on the Dow Jones Industrial Average (^DJI 0.17%) eased lower by 94 points to 34,539, while S&P 500 (^GSPC -0.21%) futures fell just 3 points to 4,450 and Nasdaq Composite (^IXIC -0.12%) futures eased lower by 26 points to 14,387.
Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.83%) has been able to outpace the broader stock market in 2022, climbing to new all-time highs and sending the price of its Class A shares above the $500,000 mark for the first time. Many have feared over the past several years that Berkshire and its CEO, Warren Buffett, might have lost their touch in finding great investments. On Monday morning, though, the Oracle of Omaha sought to prove them wrong, announcing a new acquisition that shows Buffett's interest in smart deals is alive and kicking.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Finding value in Alleghany
Berkshire's target was Alleghany (Y). Shares of the insurance company were higher by more than 25% in premarket trading on Monday morning.
Given Berkshire's offer, it's easy to understand why Alleghany accepted. The Omaha-based giant's agreement with its New York-headquartered counterpart values Alleghany at $11.6 billion, with Alleghany shareholders to receive $848.02 per share in cash.
By some standards, that might seem expensive, representing a 29% premium to Alleghany's average share price over the past 30 days and 16% higher than its 52-week high. However, it's only about 6% higher than the peak price of around $800 per share that Alleghany hit toward the end of 2019. Moreover, the transaction price gives Alleghany a valuation of 1.26 times book value, a multiple that Buffett has increasingly felt comfortable repurchasing Berkshire stock.
To be clear, the purchase isn't a done deal just yet. Alleghany has a 25-day period in which it can shop for alternative acquisition proposals. Obviously, a bidding war wouldn't be a great result for Berkshire.
However, executives from both companies stressed the natural fit between them. Buffett noted that he has watched Alleghany for 60 years and made a friendship with Alleghany CEO Joe Brandon. The Berkshire CEO also pointed to the family-led nature of Alleghany, whose board chair, Jefferson Kirby, noted the significant shareholder presence that the Kirby family has had with the company for more than 85 years.
A baby Berkshire?
When you look at Alleghany, it's easy to see huge parallels with Berkshire Hathaway. The two have similar business structures in that Alleghany also has a core position in property and casualty insurance and reinsurance.
Three key insurance-related businesses make up much of Alleghany. The company acquired Transatlantic Holdings, also known as TransRe, a decade ago, and TransRe offers a full set of reinsurance products. RSUI Group underwrites wholesale specialty insurance from its headquarters in Atlanta, while CapSpecialty has aimed at the small and mid-sized business market with its specialty coverage for commercial property, casualty, fidelity, surety, and professional lines of insurance.
Like Berkshire, however, Alleghany also owns nonfinancial businesses, using its wholly owned subsidiary, Alleghany Capital, to hold and manage them. Alleghany Capital's holdings include machine tool specialist Precision Cutting Technologies, customer trailer and track body manufacturer R. C. Tway, structural steel fabricator WWSC Holdings, Wilbert Funeral Services, and parts and assembly supplier Piedmont Manufacturing Group.
Berkshire's shares were up slightly on the news, indicating that investors seem pleased that Buffett has finally found a value play worth his notice. In choppy waters for the markets, Berkshire has been a steadfast holding, and the Alleghany acquisition aims to keep that momentum going.