Warren Buffett may have made his last major acquisition. The longtime CEO of Berkshire Hathaway (BRK.A -1.36%) (BRK.B -1.42%), who is stepping down from that position at the end of the year, recently made his first major deal since 2022. His company has agreed to buy Occidental Petroleum's (OXY -5.18%) petrochemical unit, OxyChem, for $9.7 billion.
To understand the implications of Warren Buffett's likely final deal, let's examine how it could shape the future of the company he built.
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A win-win deal
Earlier this month, Berkshire Hathaway agreed to acquire OxyChem in an all-cash transaction valued at $9.7 billion. OxyChem manufactures commodity chemicals vital to multiple industries, including water treatment, healthcare, and commercial and residential development. It's the company's second major deal in the chemicals sector, as Berkshire bought specialty chemicals maker Lubrizol for $9.7 billion in 2011.
OxyChem is a strong business. It's a leader in every major chemical product it makes. Its global scale enables the company to generate steady cash flows, even in volatile markets. The business' profitability will grow in the coming years. OxyChem has invested heavily in expanding and modernizing its Battleground plant and upgrading other facilities. These investments should add about $325 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA) starting next year. In acquiring OxyChem, Berkshire gains another reliable source of earnings.
The sale of OxyChem will also benefit Occidental Petroleum, which is one of Berkshire's largest holdings. Berkshire owns nearly 265 million shares of Occidental Petroleum, almost 27% of its outstanding shares. Those shares are worth over $11 billion, making Occidental its seventh largest holding at 3.8% of its investment portfolio.
The sale will help Occidental achieve its long-standing debt reduction goal. That will free up the company to focus on developing its treasure trove of low-cost oil and gas assets. Occidental believes this will enable it to create meaningful shareholder value over the coming years. As its largest shareholder, Berkshire will directly benefit from this value creation.
Plenty of dry power left to allocate in creating shareholder value
While Buffett is going out with a bang, he's leaving the company with plenty of dry powder to continue hunting for deals. The company ended the second quarter with a near-record $344 billion of cash.
Buffett and his team have built that position by retaining the earnings of its operating businesses and selling some of its equity holdings, notably trimming its massive Apple position. Over the past year, Berkshire's cash position has ballooned by $70 billion. The company hasn't returned any of its cash to investors this year: Berkshire doesn't pay a dividend and hasn't completed any share repurchases over the past few quarters. Meanwhile, until OxyChem, Berkshire hadn't completed a meaningful acquisition since its 2022 purchase of insurance company Alleghany Corporation for $11.6 billion.
As a result, incoming CEO Greg Abel will have plenty of resources to leave his mark on the company. He could easily afford to make the biggest acquisition in Berkshire's history. The current record deal was Berkshire's 2009 purchase of the railway company Burlington Northern Santa Fe at $44 billion. He could make a tone-setting deal early in his tenure or wait for the next major financial crisis to buy a great company at a fantastic price.
Abel could also use the cash to buy more shares of publicly traded companies, potentially waiting for a major stock market sell-off to go on the offensive. Alternatively, he could start returning more money to shareholders by initiating a dividend payment and making more routine share repurchases. Berkshire's massive cash position gives Abel ample optionality to shape Berkshire's future strategy and respond to changing market conditions.
A bright future awaits
Warren Buffett's likely final deal as CEO strengthens Berkshire Hathaway and one of its largest holdings. Berkshire is allocating some of its substantial cash position to acquire a business with durable and growing cash flows, while the sale helps one of its top holdings repay debt and sharpen its focus on creating shareholder value.
Buffett's discipline in deploying cash over the years has left Berkshire well-positioned for the future. The company still holds a substantial cash position, providing Abel with significant flexibility when he assumes control next year. He will have the opportunity to allocate this cash to drive Berkshire's growth and shareholder value. Abel is inheriting an extremely well-run company, built on a financial fortress with multiple avenues for growth, setting the stage for a promising future under his leadership.
