Berkshire Hathaway Inc. (NYSE: BRK-A) is a bit of an enigma when it comes to a traditional company. The company is the largest conglomerate of all, with a $533 billion market cap. While it owns industrials, transportation, utilities and has vast insurance service offerings, Warren Buffett and his team are also mega-investors with close to $200 billion in equity investments and close to $100 billion in cash.
With the annual meeting now days away, what should investors expect from Team Buffett? Finding that next “whale of a merger” has been elusive because Buffett himself has said that most companies out there he would want to look at are fully valued. That leaves a vacuum for what to expect. What will Buffett and his portfolio managers do with all that cash and liquidity?
There are two obvious answers here that are not simple in the execution. One thing that can happen is that Buffett could buy back a lot of stock. Seriously, a lot. Another thing that Buffett could do is to become a larger buyer of banking stocks, after recently trimming some of his holdings.
It’s impossible to know how much Buffett might really spend on stock buybacks, and he probably would be opportunistic if and when the company starts buying back its own shares. That means on big sell-offs, and perhaps that is a realistic expectation rather than buying shares at or close to all-time highs. Just last year, Buffett and sidekick Charlie Munger loosened up the share buyback requirements from certain discount thresholds to basically whenever Buffett and Munger decide they want to buy shares. This was a tell-tale sign that Buffett was having a hard time finding large acquisitions that were cheap. According to the Financial Times, that sum used for buybacks could be $100 billion. That seems ridiculously high, but they also kept an open end for what sort of time frame they meant.
One more likely scenario is that Buffett and Munger could become large purchasers of bank stocks. The full Berkshire Hathaway portfolio is loaded with bank stocks, but Buffett also disclosed in recent months that SEC regulations around 10% ownership and control meant that Berkshire Hathaway would need to sell shares to stay under the 10% threshold in order to avoid added disclosures. That may change now that the Federal Reserve is seeking comments on a proposal to simplify and increase the transparency of rules about determining control of a banking organization.
If you believe that Buffett really would like to gobble up another big merger, note that Credit Suisse named a slew of companies that would fit Buffett’s acquisition criteria and that he would approve of investors buying as an investment. Another issue to consider is that Buffett recently abandoned his evaluation of book value per share as a way to judge his company.
The Federal Reserve has released its proposed rules for investment thresholds in banks, and it is not clear that the SEC also would ease filing requirements if any passive investors such as Berkshire Hathaway invested into the banks. Still, as long as there are not more than one-fourth of directors placed by an investment group and there are no other strict business ties and thresholds met, then companies may be able to own up to 24.99% in certain circumstances.