Berkshire Hathaway (NYSE: BRK.A, BRK.B), Warren Buffett’s 4th-ranked Fortune 500 firm, is sitting on a mountain of cash. Valued at $128 billion, the awe-inspiring sum was disclosed in the company’s latest SEC filing.
And while a number that big might look impressive on a balance sheet, it’s also somewhat off-putting to BRK.A shareholders. Holding that much cash isn’t necessarily a good move when the market is soaring.
The S&P 500 is up over 10% since early October. Had Buffett leveraged Berkshire’s fortune a few weeks ago, his company would’ve likely enjoyed some of those gains.
Instead, they’ve mostly stood pat. According to a recent announcement, though, it wasn’t for a lack of trying.
In a Wednesday evening press release from Tech Data (NASDAQ: TECD), the corporation revealed that it was being bought by private-equity group Apollo Global Management (NYSE: APO) for $145 per share – valuing the company at $5.14 billion.
It’s a step-up from Apollo’s original bid at $130 per share, which was quickly outdone by a buyer who (at the time) remained unnamed.
But on Wednesday, investors learned that Buffett was Tech Data’s other suitor. He said that a week ago, Berkshire Hathaway offered $140 per share, valuing the company at $5 billion excluding debt.
Apollo followed up Buffet’s bid with their $145 per share offer, which was then accepted by Tech Data.
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This morning, TECD shares are up 12% to $144.50, just below Apollo’s purchase price and well above the stock’s all-time high.
And though investors might be disappointed to hear that Tech Data slipped away from Berkshire Hathaway, Buffett maintains that bowing out was the right move.
It’s been four years since Berkshire Hathaway made a major purchase. Over that time, many analysts have accused Buffett of being “cheap,” especially as the market made new highs month-after-month.
But Buffett could care less. To him, the premium associated with buying companies these days is far too high. The market is extremely liquid, and combined with a large number of prospective buyers, the competition for corporate purchases is fiercer than ever before.
Buffett sees that as a problem. Not just for Berkshire Hathaway, but for the market as a whole.
Across certain industries, mergers will likely become more common in 2020. Charles Schwab and TD Ameritrade, for example, just authorized a stock swap buyout that should boost the new conglomerate’s earnings.
It’s possibly the first in a long line of mergers that will dramatically change the landscape of service-focused sectors.
As a result, the market might get a short-term “shot in the arm,” but long-term, if companies are over-paying, they’ll just end up getting burned come earnings season.
And too many bad purchases could eventually lead to a market-wide slump, provided that Buffett is right in assuming that corporations are overpaying across the board.
If he’s wrong, though, he – and by proxy, Berkshire Hathaway – will likely miss out on another half-decade of impressive gains. There’s a reason that his company’s stock has stagnated since 2018, after all…
Buffett refuses to buy.
And though that might sound pragmatic, especially from the “Oracle of Omaha” himself, other investment firms have gotten rich while Buffett’s stubbornly waited for the market to cool.
Maybe the upcoming “merger mania” will prove him right. If companies continue to go overboard like Buffett thinks they will, he’ll be touted as a genius – a word that’s been used to describe Buffett in the past.
But if stock valuations keep climbing, and Buffet still doesn’t budge, he’ll just look an old curmudgeon – one that’s preventing Berkshire Hathaway shareholders from joining in on the protracted bull run.
All while more aggressive companies, like Apollo Global Management, reap the rewards.