Two acquisitions were recently announced that will affect many investors' portfolios: Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) is buying reinsurance specialist Alleghany (Y), and Anaplan (PLAN) is being taken over by private equity firm Thoma Bravo.
I like the move from Berkshire Hathaway. Warren Buffett and company have been sitting on the M&A sidelines for several years while their cash stockpile grew to more than $140 billion, but they have finally found a worthy asset at what they see as a worthy price.
On the other hand, Anaplan selling itself to a private entity in the wake of a huge downturn for growth stocks is frustrating.
Image source: The Motley Fool.
Berkshire Hathaway is built to withstand catastrophe like no other company
In his 2021 annual letter to shareholders, Buffett outlined insurance as the first of the "Big Four" business segments that account for the majority of Berkshire Hathaway's shareholder value. Property/casualty insurance has been the primary driver of the conglomerate over the years, with names like GEICO, National Indemnity, General Reinsurance, and others providing it with a slow and steadily growing stream of cash to reinvest.
To illustrate, consider Berkshire Hathaway's insurance float -- the sum of the funds paid by policyholders in premiums, from which it will eventually cover future claims, but that gets to invest for its own benefit in the interim. In 1970 (a few years after Buffett entered the insurance business with the acquisition of National Indemnity), its float totaled just $39 million. By 2010, Berkshire Hathaway's float was $65.8 billion, and at the end of 2021, it had swelled to $147 billion. That's the power of long-term compound investment growth. It's practically a positive force of nature that has given this insurance empire incredibly deep pockets to withstand the always-present threat of negative forces of nature (storms, earthquakes, etc.).
It thus makes sense that Alleghany would be the first major acquisition Berkshire Hathaway has undertaken in years. The $11.6 billion transaction cashes out Alleghany shareholders at a 16% premium to the stock's 52-week high. In return, Berkshire gets to add a company that has been steadily increasing its profitability, with free cash flow over the last 12 months totaling $1.8 billion. Alleghany's free-cash-flow generation could slow this year from its recent record pace, but it illustrates how quickly this $11.6 billion acquisition will pay off. This is a fantastic use of a chunk of Berkshire Hathaway's massive cash balance, and a great alternative to 10-year U.S. Treasuries, which yield only a little over 2% per year as of this writing.
For value investors, this is welcome news. But growth investors should take heed as well, particularly in the insurance technology space. A slew of start-ups trying to use technology to disrupt the old insurance industry have popped up in recent years, with less than desirable results for investors so far. (Think Lemonade, for example.)
That's not to say some of these upstarts won't eventually be highly successful. But while you wait for companies like Lemonade to pay off, also owning a slice of a highly profitable and still-growing incumbent like Berkshire Hathaway makes a lot of sense. And, by the way, start-ups like Lemonade rely heavily on reinsurers (which provide insurance for insurance companies) like Berkshire Hathaway.
Anaplan cashes out at a less than ideal time
Cloud computing outfit Anaplan is being taken private by Thoma Bravo for $66 per share in cash -- a total price tag of $10.7 billion. That's a roughly 50% premium to Anaplan's average trading value in recent months. Hooray! But here's the bad news: $66 is well below Anaplan's all-time high, and really only gets investors back to where they were in the autumn of 2021, before growth stocks started getting hammered.
Data by YCharts.
If you made some short-term money trading Anaplan, congrats. But if you had intended to hold it for the long term, I believe $66 per share isn't such a great deal. Sure, Anaplan -- like so many other fast-growing cloud tech companies -- isn't profitable yet. It generated negative free cash flow of $39 million last year. That operating loss will now become Thoma Bravo's problem.
However, sales were growing at a fast clip for Anaplan's brand of resource planning software, which utilizes machine learning. Revenues rose 32% last year, management had forecast about another 26% increase in 2022, and it had $299 million in cash and equivalents on the balance sheet to fund its expansion -- and zero debt. Anaplan's software tech has a lot of promise as large enterprises (like insurance and financial services companies, for example) look for more efficient ways to chart their courses and make better decisions. If the company executes, Thoma Bravo now stands to benefit.
Perhaps Anaplan will reemerge as a public company again in a few years after the private equity firm does some window dressing. It's happened before. Instructure had an IPO last summer just over a year after it was acquired by Thoma Bravo.
For now, though, Anaplan shareholders get the consolation prize of a 50% premium on the stock they own. If you're one of them, and you're looking for a place to put that money, investing it in a best-in-class acquirer like Berkshire Hathaway could be a great move right now.
