Warren Buffett buys aerospace supplier - his biggest acquisition ever

August 12
8:45 AM 2015

Billionaire investor Warren Buffett makes his biggest acquisition ever just a few weeks before his 85th birthday.

For $37.2 billion, including debt, Buffett's Berkshire Hathaway has bought Precision Castparts Corp., a global manufacturer of aircraft and engine components.

The conglomerate is paying $235 a share. While it's a 21% premium to Precision stock's closing price ($193.88) last Friday, the figure is below the $250 analysts had forecast.

Buffett has said time and again that he only buys companies he understands, and at a relatively low price. Now the question is... does the acquisition meet his criteria?

Jim Shanahan, an Edward Jones analyst, told USA Today it does. "The stock's been down. It's been hit pretty hard recently."

Precision's shares have shed some 20% for a year now, partly due to its involvement with the energy market that has been hit by plummeting oil prices. The oil and gas industry accounts for 15% of Precision's revenue.

For the 2015 fiscal year, Precision's revenue was at $10 billion, more than 70% of which from the aerospace business. With rising numbers in airline travel, the company faces bright prospects ahead.

Buffett offered to buy Precision Castparts last month after meeting for the first time its chief executive Mark Donegan at Berkshire's headquarters in Omaha. He was all praises for Donegan. "The guy is fantastic," Buffett was quoted as saying. "He's as in love with his company as I am with Berkshire, and that's saying a lot."

The Berkshire chairman and chief executive said that before deciding to meet with Donegan he knew very little about Precision Castparts, although one of his investment managers, Todd Combs, had already been investing in the company for three years. As of March 31, Berkshire owned 3% of the metal parts manufacturer.

Under the deal, Donegan stays at the helm of the industrial manufacturer, and the company's brand name and headquarters in Portland, Oregon will be maintained. Donegan has led Precision Castparts for more than a decade now.

With Buffett's hands-off policy in running his empire, Donegan is expected to continue managing Precision Castparts with very little interference.

In a statement, Donegan said, "we see a unique alignment between Warren's management and investment philosophy and how we manage PCC for the long term."

In acquiring Precision Castparts, the 84-year old Buffett makes it easier for his eventual successor to run his gigantic holding company. Buffett's industrial empire is now worth $354 billion.

"Anybody taking over the company from Warren Buffett - I think it's potentially positive here that they would be able to focus on running the business as opposed to putting capital to work initially," said Shanahan.

The deal, which comes after a string of mergers, increases Berkshire's involvement in the industrial sector. In recent years, the company has bought chemical maker Lubrizol and industrial manufacturer Marmon.

It has also acquired food processing company Heinz, in partnership with Brazilian investment firm 3G Capital. Heinz later on merged with macaroni and cheese maker, Kraft.

Berkshire's deal with Precision Castparts closes in the first quarter of 2016.

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