Buffett's Next Move: His Biggest Yet?

By Demitri Kalogeropoulos - August 21, 2012 | Tickers: BRK-B, BRK-A, DG, SWK, HSY | 0 Comments

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Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) shocked more than a few investors last week when the company disclosed what amounted to a stock selling spree by CEO Warren Buffett. Financial filings for the quarter showed that Berkshire sliced its stake in pharma giant Johnson & Johnson by almost two thirds. Berkshire also took the hatchet to positions in long-time Buffett favorites Kraft and Proctor & Gamble, too, while liquidating the company's entire holding in Intel. Coming from a man who has described his favorite stock holding period as "forever," those sales raised eyebrows.

There are a couple of theories on Berkshire's unusually heavy stock selling. One popular idea is that Buffett is prepping for his eventual retirement -- scaling back positions under his control in order to cede more responsibility to the next generation of Berkshire capital managers. The sage of Omaha is just passing the torch, this theory goes.

But I don't buy that. I think a big purchase -- on the order of $20 billion -- is coming from Buffett, and here's why.

On the prowl

First, we know that Buffett wants to go big. For at least two years now he's made that clear to anyone who would listen. In his 2010 letter (pdf) to shareholders Buffett said that the company needed "more major acquisitions," (emphasis in the original) adding "we’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy."

And in last year's letter (pdf) Buffett doubled down on the braggadocio, telling shareholders that his aim was still to "purchase some large operations." Hoping to snap up a few Fortune 500-sized companies, Buffett summed it up like this: "I’m on the prowl." 

We also have some clue to the size of deal that Buffett may be after. In May, he told Bloomberg that he wasn't able to close a potential $22 billion acquisition. That figure is right in line with Buffett's historically biggest bets. He deployed $16 billion of Berkshire's cash in the days after the Lehman bankruptcy in 2008 and spent $22 billion in his largest purchase to date, Burlington Northern Railroad in 2010.

With plenty of ammo 

That bet worked out well, and the cash coffers at Berkshire are brimming again, having rebounded from 2009-2010 lows: 

BRK.A Cash and Equivalents data by YCharts

Berkshire's conservative policy calls for the company to hold a minimum of $20 billion in cash squirreled away in ultra-safe Treasuries that pay very low yields. That's why allocating any of the company's capital in excess of that minimum is a key role that Buffett plays. That excess cash figure sits at over $20 billion, and was probably boosted even higher by last quarter's stock selling. That leaves Buffett with a play money fund of more than $20 billion.

Thinning the herd

Possible acquisition targets around that price are anyone's guess. Some names that I've seen mentioned include power tool manufacturer Stanley Black & Decker (NYSE: SWK). The company has a diverse brand portfolio and generates tons of cash, at a pace of over $1 billion a year. Dollar General (NYSE: DG), already a Berkshire holding, could also be in the cross-hairs with its $17 billion in market cap. Finally, chocolate icon Hershey (NYSE: HSY) might appeal to Buffett's sweet tooth and his penchant for U.S. businesses with strong brands. And with a market cap of $16 billion, Hershey would be a stretch for Berkshire but certainly wouldn't break the bank.

An acquisition at these levels doesn't make sense for a man that's getting ready to coast into retirement. But for Buffett, who's eager to bag another whale and has the cash to see it through, it's a logical next move.

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