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At the end of February, Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) published its greatest ever Annual Shareholder Letter to celebrate five decades under the present management. In it, both Warren Buffett and Berkshire Vice-Chairman Charlie Munger reflected (separately) on the past 50 years and attempted to look ahead 50 years. I'm not that ambitious, but drawing on that source (and others), these are three trends that I believe will alter the way Berkshire looks over the next decade:
Buffett may not be around in 2025 -- but that doesn't much matter
Warren Buffett might still be at the helm of Berkshire Hathaway in a decade, but time is not on his side. He's now 84 and, according to actuarial tables from the Social Security Administration, his life expectancy is 7.4 years (Buffett's heredity is mixed with regard to longevity; his father died at 60, while his mother lived to be 92.)
Berkshire Hathaway is Mr. Buffett's life work and he has directly contributed an incalculable amount of value to the firm through his capital allocation choices. However, his retirement or death wouldn't be catastrophic -- contrary to what some investors appear to believe. As one should reasonably expect, given the care and effort with which he has built Berkshire, Buffett has been equally deliberate in putting in place the people and the structures necessary to ensure that the business will continue to thrive without him.
The two most likely candidates to replace Buffett as CEO are Ajit Jain, the head of Berkshire Hathaway Reinsurance and Berkshire Hathaway Energy CEO Greg Abel. Charlie Munger appears to have hinted at this when he singled the duo out in Berkshire's golden anniversary letter, going as far as to write that "in some important ways, each is a better business executive than Buffett." I think Mr. Abel may have the edge, simply because, at 52, he's more than a decade younger than Mr. Jain.
Mr. Buffett is probably unique in terms of the breadth and depth of his business and investing acumen, but post-Buffett Berkshire will be in good hands -- certainly good enough to produce above-average results for some time to come. As Mr. Munger wrote: "The answer [to the question of whether abnormally good results would continue at Berkshire if Buffett were soon to depart] is yes."
More foreign deals for a larger international presence
Although much is made of Warren Buffett's stock-picking prowess, acquired businesses will contribute a lot more incremental value over the next decade than minority stakes in publicly traded companies.
In early February, Buffett told the Fox Business Network "we're probably going to buy a small business in Europe, but I'd love to buy big ones." Later than month, when Berkshire announced it was acquiring German motorcycle apparel retailer Detlev Louis Motorradvertriebs, he went further, telling the Financial Times that Europe is a natural location for "elephant hunting" (i.e., searching for large acquisitions), on the basis that "Europe has hundreds of millions of people, high incomes, productive people, so it is a great place to be. The U.S. is my first love, but I see terrific possibilities for us in Europe."
To date, Berkshire's largest acquisition outside of the United States was the 2006 purchase of an 80% stake in Israeli metal cutting tools manufacturer Iscar Metalworking Companies at a $5 billion valuation. Purely on size, that pales in significance compared to Berkshire's largest ever deal -- the 2009 purchase of the 77% of Burlington Northern Santa Fe that Berkshire did not already own, which valued the railroad operator at an equity value of $34 billion.
Buffett has a strong bias in favor of the United States ("we are blessed to have to have the United States as our home field") and it must be said that it has served him extraordinarily well. But it also excludes a vast number of outstanding businesses that don't happen to have the U.S. as their home field.
In commenting on the Iscar deal in 2006, Charlie Munger admitted that "the reason we could buy Iscar is because they are so smart. We weren't smart enough to find them, they were smart enough to find us. ... There are a lot of companies in Asia with a similar culture as Iscar. I wouldn't be surprised to see a similar thing happen in Asia."
(He's not wrong. Two years ago, I wrote that Berkshire should acquire Japanese factory automation/ industrial robotics leader FANUC, an extraordinary, world-class business that would sit perfectly next to Iscar. Since then, the shares have risen 76% in local currency terms; FANUC's market value is now $51 billion.)
Shareholders can expect an acceleration in the number of foreign acquisitions -- although not, perhaps, at a rate consistent with the opportunities. Berkshire Hathaway is extremely risk-averse and it will remain extra-cautious as it ventures beyond its native shores
More deals in branded food and beverages -- with 3G Capital leading the way
In March, H.J. Heinz and Kraft (NASDAQ:KRFT.DL) announced that they would merge to form the world's fifth largest food company, the Kraft Heinz Company. This is the largest transaction Berkshire Hathaway will have done in conjunction with Brazilian investment group 3G Capital (the two acquired H.J. Heinz together in 2013.)
I'm convinced Berkshire will do at least one more major transaction with 3G Capital over the next decade. These deals are a "no-brainer" for Buffett -- his expression. Consider the following:
- 3G Capital focuses on acquiring businesses that Buffett is already partial to: Those in the branded retail and consumer sectors (particularly in food and beverages);
- 3G Capital does the leg work of sourcing the acquisitions;
- 3G Capital then roll up their sleeves and oversee acquired businesses, pushing through significant operational improvements and, ultimately, creating enormous value.
With each deal that Berkshire does with 3G Capital, Buffett's confidence in and comfort level with the Brazilian group increases. It's already very high: As Buffett wrote in the February letter, "I knew immediately that this partnership would work well from both a personal and financial standpoint. And it most definitely has. ... We expect to partner with 3G in more activities." While this was written before the announcement of the Kraft-Heinz merger, I think it's as true now as it was then.
In fact, I think it's quite likely that Berkshire will ultimately buy out 3G Capital's stake in Kraft Heinz (following the completion of the merger, Berkshire Hathaway and 3G Capital will own a combined 51% of the company). That, in turn, could be a precursor deal to an acquisition by Berkshire of Kraft Heinz in its entirety -- talk about bagging an elephant!
Another area in which I would expect new acquisitions over the next decade is regulated industries, specifically the energy and railroad sectors. As Berkshire's cash pile -- and its cash "gushers" -- grow, these industries provide opportunities to reinvest significant amounts of capital with the expectation of earning solid (if unspectacular) returns.