Buffett: Japan Will Rebound, Look for Deals There

Monday, 21 Mar 2011 06:49 AM

 

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Billionaire investor Warren Buffett said Japan’s record earthquake is a buying opportunity and he won’t sell his shares in the country as its future hasn’t been changed because of the temblor.

Buffett canceled a trip this week to Japan to visit a factory owned by Iscar Metalworking Cos.’s Tungaloy Corp. in Fukushima prefecture, home to the reactor damaged in the March 11 earthquake and tsunami, and the site of the worst nuclear disaster in 25 years. Buffett’s Berkshire Hathaway Inc. owns 80 percent of Iscar, a maker of cutting tools.

“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 days or so,” said Buffett, speaking to reporters in the South Korean city of Daegu, where he arrived yesterday to attend a ceremony for a new factory being built by TaeguTec Ltd. “Something out of the blue like this, an extraordinary event, really creates a buying opportunity.”

Japan’s benchmark Nikkei 225 Stock Average has declined 12 percent since March 10, the day before the 9-magnitude quake. The markets in the nation are closed today for a public holiday.

Iscar Chairman Eitan Wertheimer said sales may decline in Japan after Tungaloy halted work at its factory in Iwaki, Fukushima prefecture, and evacuated most of the 1,400 employees from the local headquarters amid radiation leaks from Tokyo Electric Power Co.’s nuclear plant.

‘Won’t Change Future’

“It’ll take some time to rebuild, but it will not change the future of, the economic future of Japan,” said Buffett, Berkshire’s chairman and chief executive officer.

South Korea is a “hunting ground” for acquisitions, said Buffett, who prefers larger companies. Berkshire committed more than $35 billion to takeovers in the last two years.

“We’re ready to invest, and basically the bigger the better,” said the 80-year-old billionaire investor. “Large companies appeal to me and Korea has a number of large companies obviously, so it’s a hunting ground.”

Buffett reiterated that he is open to buying non-U.S. companies, while also saying U.S. businesses remain more likely his targets. Berkshire invested in TaeguTec through Iscar, the Tefen, Israel-based toolmaking unit.

“We do pile up cash, month by month, and we’re looking for large businesses to buy,” Buffett said. The U.S. is “the most familiar to me, so it’s most likely where we would do something.”

Outside U.S.

Buffett is seeking deals in the U.S. and abroad as earnings climb at Omaha, Nebraska-based Berkshire. He agreed this month to pay about $9 billion for engine-additive maker Lubrizol Corp. (LZ) and last year bought railroad Burlington Northern Santa Fe for $26.5 billion.

Berkshire’s cash holdings rose to $38.2 billion as of Dec. 31, prompting Buffett to tell investors two months later that his “elephant gun has been reloaded.”

“He can still write a check for $30 billion or $40 billion,” Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner, said after the March 14 announcement of the Lubrizol deal.

Buffett doesn’t pay a dividend or repurchase stock, preferring instead to buy companies and securities with his firm’s profits. In four decades running Berkshire, Buffett has accumulated more than 70 subsidiaries selling products from Geico car insurance to Dairy Queen ice cream and NetJets Inc. flights. The Lubrizol deal, an all-cash transaction, will be completed in the third quarter, the companies said.

Seeking Opportunities

Buffett, whose largest non-U.S. acquisition was the 2006 purchase of Iscar, is traveling in South Korea and India to visit Berkshire’s operations and look for opportunities. Iscar was purchased for $4 billion. He visited China in September.

Buffett transformed Berkshire over the last decade by adding shipping businesses and real-estate brokers to the company’s insurance, energy and consumer-goods units. David Sokol, a Berkshire energy executive, said Buffett has the access to capital and confidence to pounce on an opportunity and isn’t limited by devotion to certain industries.

“Warren’s not the kind of investor to buy something because it fits a plan,” Sokol, chairman of Berkshire’s MidAmerican Energy Holdings, said in an interview in August. “He buys something if it makes economic sense and he believes in the long-term capability of that business.”

Buffett heads a staff of about 20 at Berkshire’s headquarters and delegates operational authority of subsidiaries to the CEOs of each unit.

His only instruction to Lubrizol CEO James Hambrick, who will continue running the firm after Berkshire’s takeover, was: “Just keep doing for us what you’ve done so successfully” for investors, Buffett said.

European Visit

Buffett traveled to Europe in 2008, visiting Germany, Italy, Spain and Switzerland where he touted Berkshire as an attractive buyer for family-run businesses whose managers may want to retain roles with the companies they built. That trip was arranged by Angelo Moratti, an Italian energy executive and Wertheimer.

Berkshire’s growth has prompted Buffett to focus more on businesses such as power producers and railroads, which require consistent investment in infrastructure and equipment. Last year, Berkshire posted $13 billion of net income and spent $6 billion on property and equipment. He has taken at least $2.25 billion in dividends from Burlington Northern since the February 2010 takeover.

Pricing Power

The most important criteria when evaluating a business is pricing power, Buffett told the Financial Crisis Inquiry Commission in May.

“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business,” he said in a recording released by the FCIC in February.

Buffett has said he also focuses on a company’s management and ability to distinguish its products from those of competitors when deciding whether to invest.

Buffett’s investment criteria include companies with “good returns on equity,” little or no debt, “simple” businesses that he can understand, and consistent earnings, he said in Berkshire’s latest annual report.

Buffett doesn’t participate in auctions for companies and can tell prospective sellers within five minutes of an offer if he is interested in making a deal, he said in the report.

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