Shortly after Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) CEO Warren Buffett spent $12 billion in cash last month to acquire 50% of H.J. Heinz (HNZ +0.00%), he told the world he was ready for more.
Of course, there's certainly reason to believe the man given his past acquisition record; he spent $46.3 billion over the past seven years for Berkshire's stakes in Iscar, Marmon, Burlington Northern, and Lubrizol.
With that in mind, I noted recently that it might be a good idea for Buffett to shell out some dough to acquire a much smaller financial holding company like Markel (MKL +0.81%).
Source: AP.
Today, I'd like to spend a little more time exploring that thought, so here are three big reasons Markel could be a great fit with Berkshire.
Leaders at the helm
Markel sports a deep bench of management including CEO Alan Kirshner as well as president, CIO, and renowned value investor Tom Gayner. I've spent a little time analyzing their words over the last couple months, so I'll reference you to those previous articles (see here and here) to get an idea of just how effectively they are running their business.
With this in mind, if Berkshire were to purchase Markel with its autonomous leadership team, we could rest assured Buffett would have no problem letting them continue doing what they do best, especially considering what he wrote in his 2009 letter to Berkshire shareholders:
We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree...Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner oriented-attitude that is invaluable and too seldom found in huge organizations.
Additionally, Buffett later went on to shun the inefficiencies of "a stifling bureaucracy" -- another stance with which (as I noted back in February) Markel's Kirshner wholeheartedly agrees.
The best things in life are free
Like Berkshire, Markel also operates a number of insurance subsidiaries, but instead with its current focus primarily resting on traditionally difficult-to-insure niche markets that range from specialty schools to museums, sports leagues, horses, health clubs, boats, and event cancellation (to name just a few).
In addition, last December, Markel announced its largest acquisition to date in buying rival insurer Alterra (NASDAQ: ALTE), which greatly expands its insurance and reinsurance operations.
So how can this benefit the Oracle of Omaha aside from simply generating additional underwriting profits?
Like Berkshire with Buffett, Markel relies on Gayner's investing prowess to make the most of its shareholder equity. The big difference, however, is that Berkshire's massive balance sheet allows Buffett to also invest its insurance float, which gave him more than $73 billion in free money to work with in 2012.
While the added capital from the Alterra deal could very well give Markel the flexibility to eventually do the same on its own going forward, to be able to invest Markel's shareholder equity and insurance float would be icing on the cake for Buffett and Berkshire.
Investing in the little guy
Sure, Buffett has spent a ton of money buying massive businesses in the past decade, but last year alone, he also forked out $2.3 billion on smaller bolt-on acquisitions. Given Markel's current market capitalization of just $5 billion, it should come as no surprise that Gayner, who is also president of Markel Ventures, is well versed in pursuing exactly the types of small acquisitions for which Buffett is so fond.
In fact, according to the Markel Ventures' website, they look for:
- Profitable businesses with good returns on capital.
- Talented management teams and a culture of integrity.
- Reinvestment opportunities and capital discipline.
- Fair prices.
What's more, Gayner prefers to use little or no debt with Markel's acquisitions, maintaining a stated long-term goal of building "a great company comprised of solid businesses."
Foolish final thoughts
All things considered, it's no wonder Markel is often touted as a miniature version of Berkshire Hathaway. In any case, given Markel's superior management team, insurance operations, and demonstrated knack for growing the business through small acquisitions, don't be surprised if Buffett makes a play to absorb the company to the long-term benefit of Berkshire shareholders.
