Does Berkshire Hathaway's Latest Acquisition Make Sense?

Berkshire Hathaway (BRK.A -0.56%) (BRK.B -0.47%) plans to buy insurance company Alleghany (Y) for $11.6 billion.

In this podcast, Motley Fool analyst Jason Moser analyzes:

• The reaction from investors.
• Berkshire Hathaway's increased exposure to the insurance industry.
• The potential for another acquisition in the next few years.
• Warren Buffett's patience and relentless focus on price, and what it can teach all investors.

Motley Fool contributor Rick Munarriz talks with Carnival Cruise Line (CCL -1.19%) CEO Arnold Donald about how his company is preparing for the post-pandemic world.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 21, 2022.

Chris Hill: One CEO is preparing for the post-pandemic world and another CEO just made one of his biggest acquisitions ever. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Jason Moser. Thanks for being here.

Jason Moser: Hi, thanks for having me.

Chris Hill: Warren Buffett just went deeper into the insurance industry. Berkshire Hathaway is buying insurance company Alleghany for just over $11.5 billion. This is an all-cash deal. Shares of Alleghany up more than 20 percent, which is understandable given the buyout price. Shares of Berkshire Hathaway are up about two percent and hitting a new all-time high. It did hit an all-time high last week. This is on top of that. Based on the reaction from investors, this seems like a good deal, but you worked in the insurance industry once upon a time. What do you think of this deal?

Jason Moser: Yeah. It seems like it's an OK deal, I guess. Alleghany is an interesting business in that it's very similar to another ensure that we like to talk about here in Markel. I was thinking about this all the way back to 2010. You may remember we had that real money portfolio series we ran on fool.com, that Rising Stars real-money portfolio thing. I had brought Alleghany over to the watch list in the portfolio that I was running at the time because it peeked my interest because it was so much like Markel. I think that the difference between Alleghany and Markel and ultimately the real reason why I just couldn't get behind buying the stock at the time is just Alleghany is a very conservatively run and that's not a bad thing. It's just really it didn't seem like it had the growth prospects that other companies could have. Now, if you look at how Alleghany and Markel have performed over the last, let me see here, 10 year chart for both of these companies, Markel is up 240 percent, well outperforming Alleghany. Alleghany around 155 percent. It's not like it's been a bad investment, but it's trailed the market. I think part of that is just because it is so conservatively run. I think that could be one of the reasons why Warren Buffett really actually likes it. It seems like it's right in line with his style thinking. I think that with Alleghany, the neat thing about this business is jumping into the Berkshire folders is that it is heavily exposed on the reinsurance side, so this is really an investment and reinsurance more than anything else because if the business itself breaks down, you've got the business of insurance, and then it's got the Alleghany capital, which is like that Markel Ventures. But the insurance part of the businesses is close to 70 percent and most of that is reinsurance. It's reinsurance play from that angle, and I understand from that perspective why Buffett and family would like to bring this into their family.

Chris Hill: When we talk about Berkshire Hathaway, obviously there are the investments in the portfolio and that's where companies like Apple come into play, and then there are the businesses that Berkshire Hathaway runs. In terms of that portfolio of businesses, obviously, this increases the exposure to the industry of insurance. Is there any downside to that? It's one of those questions that I have to ask. Obviously, I assume Buffett and his team know what they're doing, and they're not going to take undue risk. But it just struck me the second I read this story like, it's another insurance company.

Jason Moser: Yes. That's a good question because I think most people when they hear Berkshire Hathaway, most investors reminds immediately go to GEICO and insurance. We think of Berkshire Hathaway as this insurance company first and foremost and that's a fair thought. If you look at the breakdown of the company's revenue at around 27 percent of revenue in 2021 was thanks to insurance. Manufacturing is still a very big part of Berkshire Hathaway. Around 25 percent of revenue came from manufacturing, and then it has all of these other little pieces of the business as well. As far as earnings though, interestingly, insurance side of the business is only about 20 percent of the earnings or the operating earnings side of the business. It's actually getting most of its operating earnings from the manufacturing side. This gives them a little bit more exposure to the insurance business. It's not something that I think tilts the scale too heavily, and given that Alleghany historically has been so conservatively run, I think that's probably something that gives Berkshire Hathaway a little bit more peace of mind there. But insurance, it's an interesting business for sure. It is one of those things we talked about a lot because it's something that everybody needs. You don't have an option in many cases and then when you think about how insurance works, and then you look into the reinsurance side of the business, there's just a lot of opportunity there but it does come with a lot of risk, and its risk that is difficult to predict at times so scale matters. I think the bigger you are in the insurance business, the better off you are. It's like having a well-diversified portfolio, and given their track record in the space, given their experience in this space, they are clearly very good at what they do. They know the insurance business inside and out which is another thing to keep in mind there, so it feels like this isn't anything that really tilts the scales in such a way that you concern investors down.

Chris Hill: This is the first acquisition Berkshire Hathaway's made in six years. In terms of raw numbers, this is, I believe, a top-five acquisition just in terms of money spent. But when you think about the cash on hand, the Berkshire Hathaway has amassed over the last six years. Someone asked me earlier today, was this Buffett getting out his elephant gun and I said, [LAUGHTER] it doesn't feel like it, even though it's a large acquisition relative to the cash that they have on hand, it doesn't seem as big. I'm tempted to say it's not going to be another six years before they make another acquisition, but I don't know. The patience that Buffett and his team have exercised is pretty admirable.

Jason Moser: Yeah, I do agree. He's not wanted. Just go pay any price just to do something. He and Charlie Munger are very good at sitting on their hands and waiting for the right opportunities. It feels like they are getting Alleghany for a good price. It's a business that historically is hovered around book value, which is a good metric to gauge insurance companies and they're paying, I think, around 1.25 times book value as the acquisition price here, but you're right. You're looking at a business here in Berkshire Hathaway with something like a $150 billion in cash on the balance sheet to do with whatever they like. In the context of that, it is not firing off that elephant gun so to speak. But I think that ultimately what he sees is a business that he has admired for a long time. He said that, and it's a business that he feels like he is getting at a fair price. It's not something where he is buying back his own stock. Alleghany is going to continue to be able to operate independently as part of the Berkshire Hathaway family, that's the model that they employ there, and it works out very nicely for them. The acquisition to me, it's not something where I feel like there are other bigger opportunities out there that would there would be more of an attention getter. Maybe he does want one last real shot at something like that. Who knows? It's always worth mentioning he and Charlie obviously are not getting any younger. But by the same token, even beyond their time, I suspect we'll even see Todd and Ted take some interest there, or rather Greg Abel, who will takeover as CEO it is possibly finding some acquisitions that might be a little bit more line with their comfort zone. I think one of the things with Warren and Charlie is that they know themselves as investors. They know their circle of competence, and they don't often want a step too far outside of it. They really taking advantage of those opportunities within that circle. I think it'd be fair to say that future leadership would have a different circle or at least an expanded circle, times change. Perhaps there's something there. I don't think this is the last deal we will see them make, but you just never know, I guess.

Chris Hill: The last thing and then I'll let you go. I'm glad you mentioned the book value because Berkshire Hathaway went out of their way in announcing this deal to signal to their shareholders, and the world, hey, we're not paying a lot for this thing. We're paying less than 1.3 times book value, and you talked about how in this industry scale matters. I think hearing is the lesson for all of us as investors, and it's something you've talked about before. Price matters. The price that you pay for something matters. This is one of those things where I don't own shares of Berkshire Hathaway. I'm not invested in the insurance business in any way, shape, or form, yet I look at this deal, and I'm able to take that lesson from it because particularly when the market has been as volatile as it's been, it's a nice reminder that, if you're patient and you focus on the price you're paying for something, that's going to reward you in the long run.

Jason Moser: I think that'll continue to be the case here. When you look at the valuations today, even with all the volatility and we still have a lot of valuations out there that are still lofty. We're still on that 10, 20, 30 time sales environment in some cases here, it's as we move more toward this tech weighted economy. I'm certain they are so comfortable with that. They are getting, I think, a very a reputable business, a good company with good leadership and they're getting a good price for it. This is not something where they're paying too much. It's a little bit of a premium for a business that has a pretty consistent track record and I think this is really actually probably the best outcome for Alleghany shareholders given the history. I talked about those returns earlier on. It's not like you've lost money being invested in Alleghany. You've made money, but it's trailed the market. It's not the best performing insurer out there, and given the nature of leadership there, I think you can expect them to continue on with that strategy of taking the conservative view. Now maybe there's more opportunity as this company grows in that Alleghany capital side. I think that's always something that's worth keeping an eye on, because we've seen Markel through the years really build that Markel Ventures side of the business. I think that would be something really to keep an eye on there because it's a philosophy that very much lines up with Berkshire Hathaway's, but yeah it does feel like they saw a business that they believe in, they were able to come to a price that they felt like was fair, and so it does feel like this is a win-win for Alleghany in Berkshire.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you. 

Chris Hill: What's makes for a good investment? Obviously, Warren Buffett thinks he's made a good investment by buying an insurance business. What about building a roller-coaster on a cruise ship? Is that a good investment? Our man, Rick Munarriz, talked with Carnival Cruise Lines CEO Arnold Donald, about how his company is preparing for the post-pandemic world.

Rick Munarriz: A lot of companies in the consumer leisure industries have taken advantage of the pandemic low to roll out features that they probably wouldn't have been able to complete during normal times when they were fully operating. The multiplex operator, AMC, for example, they introduced reserved seating and made private rentals a bigger part of its strategy. Disney World wrapped up its mobile ordering platform and recently introduced a premium product for access to expedite cues The cruise industry has had an unfortunately long break, but what was Carnival able to do that it probably wouldn't have been able to do otherwise in that low?

Arnold Donald: Look, we're really excited about getting so many of our ships sailing again, as you mentioned, we have more than 50 percent of our ships sailing. Hopefully by 23 we'll have all of the ships sailing back on itineraries that people love along the way to ensure that people have great success in terms of meeting their aspirations of joyful vacation experience and also memories, we have done a number of things to enhance the experiences on the ships. First of all, we as a corporation, have removed out less efficient vessels because we do have a real focus on efficiency and sustainability. We've moved on almost now 22 ships, we plan to exit they were at least efficient vessels so the pause gave us opportunity to accelerate that. Then we doubled down on the great features that people love with new ships. We have a number of new ships coming in. The specific features and Princess line, you probably familiar with Princess Medallion, is our breakthrough experience that allows you to basically with a little disk that opens your door, there is touchless payments, which is great in this particular environment. A lot of things are touchless with it. You can order whatever you want and It'll come to you wherever you are on the ship. It's a great frictionless travel, highly customized feel, experience for guests, we've been able to put Medallion across the Princess fleet during this pause. Almost every Princess ship sailing again, will have Princess Medallion available to its guests. In our other brands, we have exciting things like our new Mardi Gras ship with the Carnival brand with the first roller coaster at sea, it's a fantastic individual experience. But beyond that is a ship that features unbelievable options in terms of dinning, entertainment, etc. We replicated that experience across our global fleet, well, Arvia ship, coming with P&O in the UK. New ships, new features, all around one common thing though, which is frictionless travel allow people to have the joyous memories that they want to have, to pull people together, families and others together and really live the human spirit that is cruising. You going to have a great time, guests from all the scores are through the roof and we're going to continue to innovate.

Rick Munarriz: You recently reveal details of Carnival Celebration, which is a new ship that's going to debut out of Miami in November. I believe. It's going to be your second ship running on liquefied natural gas or LNG, what kind of impact will this have on operating costs? Or is this more about a shift to eco-friendly green cruising?

Arnold Donald,: Rick, this is more than just two. We actually we'll have six ships by the end of this year on LNG. There'll be two in the Carnival fleet, with Mardi Gras and then Celebration. We're excited, obviously Mardi Gras has been a huge success. We're excited about both. LNG is a step. We know it's not the ultimately answer, whether it helps us on our path to reduce our carbon emissions, LNG is about 20 percent more carbon emission efficient than other fossil fuels as the cleanest burning fossil fuel. We see it as a step in the direction. As we can see on our march for 40 percent reduction in carbon intensity by 2030 and ultimately hoping to get carbon neutral by 2050 and frankly, we like to achieve zero emissions by 2050. That's our aspiration or unless we move to. Since its a step in the right direction, we've had a lot of success today. We reduced our intensity by over 25 percent over the past several years. My goal is to ultimately be at 40 percent reduction as I mentioned by 2030.

Rick Munarriz: You mentioned the roller-coaster on Carnival, Mardi Gras. When I was a kid back in my first cuisine in the 1980s, I went with my parents, we went on the QE2 trans-Atlantic from England to New York and the big feature there was, there's a swimming pool, but it's underneath. Very cold, very wavy and obviously ocean water, not very pleasant. Features have evolved a long way since then. I was looking at the Mardi Gras with the roller-coaster, 800 feet long topping off at 40 miles per hour. What comes next in terms of onboard diversions and I know you can't comment on things that maybe in the works, but what do you think is possible on a cruise ship, say five years from now that is not available right now?

Arnold Donald,: Well as you mentioned both is the first roller coaster at sea. Let say guest here people love it. I've ridden it myself and I have to tell you, it is a thrill, it is absolutely an engineering marvel. It's a thrill ride out for sure it's a lot of fun. But both like all the other features on our ships especially you mentioned the Carnival brand where we're both just on Mardi Gras. The brand itself is about social, its about fun, Thunderstruck is about fun. Both represents another example of fun. On a Carnival ship. The idea is just to engage guests in a way where they're having fun and they're realizing the socialization that they chose Carnival, which is why they chose Carnival brand in the first place, they're realizing the socialization that they aspire to. We have a whole host of features and it can be anything from a comedy club to a roller coaster. But eventually there will be metaverse type activities onboard the ships. Ocean or Princess Medallion is an example of a first step toward that. You have all the avatar on board. The avatar follows you wherever you go, you can engage in other activities through the Princess Medallion experience. You'll see more of those things. But in the end this is a hospitality business. We want people to achieve what they want. In the case of Carnival is fun, and joyful social exchange. We wanted to do it in a way, where it's frictionless so it's hassle-free. For them it feels customized for their individual tastes. That's what all the movement and all the little features on ships are intended to do to create that general atmosphere, that frictionless experience, and then the highly individualized custom feel to it so you feel like a vacation as it should be was designed for you.

Rick Munarriz: Great, thanks. Hopefully we all respect the railings when we get into the metaverse, you don't get so immersed that we [LAUGHTER] don't take things that are not safe. But yeah, I love the direction that the cruise industry and Carnival particular are going. That's great. One of the more exciting aspects of the leisure industry for investors is that many companies are making more with less. I mentioned AMC and Disney before. I mentioned them again AMC theaters, for example, there are nowhere near 2019 as far as ticket sales, but concession sales per patron are up sharply. Universal Orlando in Disney World are coming off of record or near record quarters, despite not being at full strength and with international travel restrictions, limiting the amount of guests that are even getting. Most of the leading hotel operator stocks hit new highs back in February. Despite being limited at capacities as guests are accepting higher rates, folks are willing to spend more when it comes to escapism. Are you seeing that for the cruising industry?

Arnold Donald,: Absolutely. We have definitely seen an increase on onboard spending. The reality is we're going to be celebrating our 50th birthday for the Carnival grant this month. In that 50 years, there's only been one year as a corporation, not just from the Carnival brand, it's only been one year we haven't seen an increase in onboard spending. Every year it goes up. For us is simple. We try not to sell anything, people on vacation have some time they want to spend a little bit of money. We just have to understand what they want and make it available to them. If we do that, then they buy. So we try not to sell anything, but just make things available that people want. What we've seen in the return from the pause is that sales are onboard activities is through the roof in terms of spending and that's onboard for some awesome things, excursions, etc. While we've seen increases in the past, these increases have been extraordinary whether it can sustain itself at that pace we'll have to see. But we're certainly excited about what we're seeing today and we have every expectation that it will continue to increase over time based on some of the innovations we talked about earlier and just based on the general mood of people who are anxious to go out and experience the world. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.