Are there lessons to be drawn from Berkshire Hathaway Inc.'s takeover of Lubrizol Corp.?
Observers have been quick to point out that the $9-billion (U.S.) deal conforms to Warren Buffett's usual approach to deal-making. Lubrizol is unglamorous, providing chemicals used in industrial lubricants, which doesn't exactly have iPad status. The valuation on the stock is low, given that it trades at just 12.5-times trailing earnings.
It is consistently profitable, with rising earnings and revenues. And in another necessity on the Buffett checklist, top management has been in place for some time: Lubrizol's chief executive assumed the top job in 2004, and has been with the company since the 1970s.
As the New York Times pointed out, the all-cash deal might also suggest that Mr. Buffett believes Berkshire Hathaway's stock is undervalued. Mr. Buffett noted before that takeovers financed with stock make sense if that stock is overvalued, making it a potent currency. All-cash deals, on the other hand, make sense if the acquirer believes his or her stock is cheap.
Berkshire Hathaway shares were down on Monday afternoon, following the announcement of the Lubrizol deal - but so is the rest of the market. They have fallen 4.2 per cent since the end of February, which is also in line with the S&P 500, and currently trade at about 18-times earnings.
But one of the more interesting aspects of the Lubrizol deal is that Mr. Buffett clearly isn't worried about missing out on buying the company at its recent low. During the bear market downturn that ended in March 2009, the shares fell to a low of $23.75. They had risen 340 per cent by the time Mr. Buffett pulled the trigger on the acquisition, or more than three-times the pace of the S&P 500 over the same period.
On top that, Mr. Buffett agreed to pay a 28 per cent premium for the company, or a takeover price of $135 a share. That's a gain of nearly 470 per cent from Lubrizol's 2009 low.
If you are worried about investing in stocks after the tremendous bull-market run of the past two years, this move by Mr. Buffett might ease some of your concerns.