With 2017 a quiet year for Berkshire Hathaway’s acquisition activity, save for acquiring a 38.6% partnership interest in travel-center operator Pilot Flying J, Warren Buffett used his 2017 annual letter to shareholders to reassure that Berkshire would continue to make large acquisitions only when the price is right.
Buffett pronounced the Pilot Flying J acquisition as “sensible,” and noted that he would not join other CEOs in paying outlandish prices for companies.
“The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own,” Buffett wrote.
“Why the purchasing frenzy? In part, it’s because the CEO job self-selects for ‘can-do’ types,” Buffett noted. “If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large ‘synergies’ will be forecast. Spreadsheets never disappoint.”
© 2018 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.