Mon, May 07, 2007 page11

• Berkshire on the prowl: Buffett

  HUNTING SEASON Warren Buffett is on the lookout for an `enormous deal' as he believes the time is right for the firm to make a major acquisition

  • BLOOMBERG
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  Berkshire Hathaway Inc's Warren Buffett usually laments that his company has more cash than investment opportunities.

  On Saturday, he envisioned an acquisition so big that he'd have to sell some stocks to free up funds.

  "We're as prepared as we've ever been to buy a big business outright," Buffett, 76, told about 27,000 shareholders and admirers at Berkshire's annual meeting in Omaha, Nebraska.

  

  Billionaire investor Warren Buffett thanks performers at the Fruit of the Loom booth during the annual Berkshire Hathaway shareholders meeting in Omaha, Nebraska, on Saturday. Fruit of the Loom is a Berkshire Hathaway company.

  PHOTO: AP

  "One way or another, we'll swing them," he said.

  Buffett built Berkshire over four decades, buying out-of-favor stocks and companies to transform it from a failing textile maker to a US$168 billion holding company in industries as diverse as insurance, ice cream and electricity.

  The firm, which has about US$46 billion in cash, must ignore "mice" in favor of "elephants," Buffett said in his investor letter in March.

  "He's shouting from the rooftops: `Bring me enormous deals. There's no deal that's too large for us to look at,'" said Whitney Tilson, a managing partner at New York-based T2 Partners LLC, which owns US$30 million in Berkshire shares and options.

  "Let's say a US$40 billion acquisition came along, he might need to raise US$10 billion of additional cash," Tilson said.

  Buffett invests insurance premiums from subsidiaries such as Geico Corp, the fourth-largest US car insurer, until claims need to be paid.

  Last year Berkshire's MidAmerican Energy Holdings Co bought PacifiCorp from Scottish Power Plc for US$5.1 billion in the firm's biggest deal since the 1998 acquisition of reinsurer General Re Corp for US$17.6 billion. Berkshire also bought its first non-US company, paying US$4 billion for 80 percent of Israeli toolmaker Iscar Metalworking Co last July.

  "The challenge is really to find ways to put the money out intelligently," Buffett said in an interview before Saturday's meeting. "We have 10 or more billion dollars a year coming in that's free to go into almost anything."

  Berkshire's stock portfolio, US$61 billion as of yearend, includes equities such as Coca-Cola Co, American Express Co and Burlington Northern Santa Fe Corp.

  Buffett, who first disclosed an 11 percent stake in Burlington Northern last month, said on Saturday that higher fuel prices have made railroads more competitive against the trucking industry.

  "As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors -- truckers -- roughly by a factor of four," he said.

  One investment Buffett had to defend was Berkshire's US$3.3 billion stake in PetroChina Co.

  China National Petroleum Corp, owned by the Chinese government, holds a controlling stake in PetroChina as well as oil reserves and pipelines in Africa's Sudan. Leaders in Sudan have been accused of supporting genocide in the western region of Darfur.

  "We have no disagreement with what PetroChina is doing," Buffett told shareholders after announcing that a resolution calling for Berkshire to sell its PetroChina shares was voted down by a margin of 53-to-1.

  "If there was a disagreement, it would be with what the Chinese government is doing," Buffet said.

  Berkshire's own shares are up about 3,600 percent since 1987, six times more than the New York Stock Exchange Composite Index, which measures the performance of all the companies listed on the Big Board.

  They rose US$650, or 0.6 percent, to US$109,250 on Friday in New York Stock Exchange composite trading. They have dropped 0.7 percent this year, compared with the 6.2 percent advance of the Standard & Poor's 500 Index.

  Buffett's annual meetings are as much a chance for admirers to hear the world's third-richest man opine about the economy and markets as to be updated about Berkshire.

  Berkshire businesses related to residential construction have been hurt by a housing slump in the US economy that is likely to continue for "quite a while," Buffett said.

  Mortgage lenders seeking more business loosened underwriting standards last year, triggering default rates that pushed at least 50 companies to file for bankruptcy, shut down operations or seek buyers in the last 16 months, according to Bloomberg data.

  The subprime mortgage crisis won't be "any huge anchor" to the economy, he predicted, though lenders and borrowers will have "plenty of misery."

  "It will be a very big problem for those involved, but I think it is unlikely that factor alone triggers anything in the larger economy," Buffett told about 27,000 people crowded into Omaha's Qwest Center.

  The prediction assumes unemployment doesn't increase "significantly" and interest rates don't go up "dramatically," he said.

  Buffett warned about the dangers of derivatives -- financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

  The US Federal Reserve's efforts to regulate the use of credit to purchase securities have been made irrelevant by derivatives, he said.

  "The introduction of derivatives just made any regulation of leverage a joke. It's an anachronism," he said. "[Because of them,] there will be some very unpleasant things that happen [in the financial markets]. We may not know exactly where the danger begins and at what point it becomes a super danger."

  Berkshire, which gets about half its profit from insurance, capitalized last year on a retreat by rivals wary of covering the US Gulf Coast after the record 2005 hurricane season.

  Investors shouldn't expect underwriting profit to jump 82 percent again, as it did in the first quarter, he said.

  "The insurance earnings are going to go down, there's no question about that. It's up to Mother Nature how much," he said. "What we really hope over time is more or less to break even on underwriting of insurance."
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