Buffett says 'sprawl' is good, but may not be good enough

February 28
6:17 PM 2015

Warren Buffett wants to buy more businesses to add to Berkshire Hathaway Inc's "sprawl," but cautioned it may not keep the company he has run for 50 years from evolving into something rarely used to describe it up until now: average.

In his annual letter to shareholders, Buffett on Saturday said Berkshire's huge balance sheet gives him the power to funnel capital to some of the more than 80 operating units that deserve it, while its decentralized structure makes it the "home of choice" for many businesses looking to sell.

"Berkshire is now a sprawling conglomerate, constantly trying to sprawl further," Buffett wrote. "In an operating sense, Berkshire is not a giant company, but rather a collection of large companies."

That sprawl, including 9-1/2 businesses that would on their own make the Fortune 500 - Berkshire owns half of ketchup maker H.J. Heinz Co for instance - may limit its power to outperform.

Indeed, that power has been waning.

Berkshire's book value per share, Buffett's favored growth measure, has after taxes risen less than the Standard & Poor's 500 index including dividends, pre-tax, in five of the last six calendar years, after dwarfing the index in the prior 44 years.

Its stock price has also slightly lagged the index since the end of 2008, the company said.

"The bad news is that Berkshire's long-term gains - measured by percentages, not by dollars - cannot be dramatic and will not come close to those achieved in the past 50 years," Buffett wrote. "The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won't be great."


Buffett still wants Berkshire to make acquisitions in the $5 billion to $20 billion range. And purchases could be even bigger if he teams with partners, such as Brazil's 3G Capital.

That firm bought the rest of Heinz and got $3 billion from Berkshire to help its Burger King unit buy Canadian donut chain Tim Hortons, creating Restaurant Brands International Inc.

Buffett said he expects to work with 3G on more activities.

He also questioned the wisdom of deferring too readily to investment bankers who advise what to buy and sell.

"Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 percent to 50 percent premiums over market price for publicly-held businesses," he wrote.

"A few years later, bankers - bearing straight faces - again appear and just as earnestly urge spinning off the earlier acquisition in order to 'unlock shareholder value,'" he added.

Still, Berkshire is sitting on $63.27 billion of cash and its most recent purchases have been comparatively small.

They have included the AltaLink electric transmission unit in Canada, and Van Tuyl Automotive, the fifth-largest U.S. auto retailer. Berkshire also plans to acquire Procter & Gamble Co's Duracell battery unit later this year.

Once in Berkshire's stable, those companies will likely stay.

Though Buffett does shed or give up some businesses - the textile company that gave Berkshire its name was closed in 1985 - Buffett said spinoffs "make no sense," citing tax reasons and a belief that businesses are worth more within Omaha, Nebraska-based Berkshire than on their own.

Buffett said his eventual successor at Berkshire, whenever he or she takes the job - "gender should never decide" - will need to monitor those businesses closely, and as Berkshire grows larger fend off the "arrogance, bureaucracy and complacency" that can destroy seemingly indestructible companies.

"For very good reasons, business owners and operating managers with values similar to ours will continue to be attracted to Berkshire as a one-of-a-kind and permanent home," Buffett wrote, italicizing "permanent" for emphasis.

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