With everyone from Apple to Google being talked about as a possible suitor for exercise equipment and media company Peloton Interactive, one name that should probably be struck from the list is Berkshire Hathaway.
This week, Blackwells Capital LLC, an alternative investment management firm that is a significant shareholder of Peloton sent the Peloton Board of Directors a comprehensive presentation outlining the need for immediate change in leadership and demand for the Board of Directors to initiate a strategic alternatives process to maximize value for the benefit of all shareholders.
In its presentation, Blackwells Capital called for the company to immediately put itself up for sale, and listed 18 companies as Potential Strategic Acquirers. Of the companies on that list, only seven checked all the boxes that Blackwells identified as making Peloton attractive as a strong strategic fit.
One of those seven companies was Berkshire Hathaway, which owns a number of leading athletics brands, including Spalding, Russell Athletics, and Brooks Running.
Blackwells states that “At a $75 per share purchase price, an acquisition of Peloton would be accretive to many strategic buyers with very modest cross-selling and penetration assumptions.”
With Berkshire sitting on $146.2 billion in cash as of September 30, 2021, an acquisition of Peloton’s size would barely put a dent in Berkshire’s cash hoard. However, Blackwells own presentation shows why they should not count on Berkshire riding to the rescue. The presentation state that “Peloton is worth significantly more to a strategic acquiror than as a standalone business, especially given the difficult turnaround ahead.”
It’s that “difficult turnaround” that most likely dooms any prospect of a Berkshire acquisition, as Berkshire doesn’t do turnarounds.
Don’t take my word for it, Warren Buffett stated in Berkshire Hathaway’s 2017 Annual Report that his acquisition criteria includes:
Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)
With Peloton in dire need of a turnaround, as Blackwells itself has stated, and the company’s appointment of a new CEO and layoff of nearly 3,000 employees demonstrates, this is exactly what Buffett is not looking for.
Berkshire is looking to acquire companies that are churning out money, not losing it hand over fist.
While Blackwells may have identified companies that would be eager to get into a bidding war for Peloton (something that Berkshire also doesn’t do), it would be well advised to heed Buffett’s other aphorism about acquisitions:
“We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels.”
© 2022 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.