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By Jason Stipp | 04-25-2011 01:30 PM

Berkshire's 'Elephant Gun' Needs Big Target

As Berkshire gets larger and larger, its acquisition opportunity set gets smaller and smaller, says analyst Drew Woodbury.

Jason Stipp: I'm Jason Stipp for Morningstar. With the Berkshire Hathaway Annual Meeting on tap for this weekend, we are keying in on some of the big themes for the company.

Today I am checking in with Berkshire co-analyst Drew Woodbury to talk a little bit about the firm's acquisition track record and the road ahead.

Thanks for joining me, Drew.

Drew Woodbury: Good to be here, Jason.

Stipp: First question for you, this firm has a very long and storied history of acquiring companies and successfully continuing to run those companies. What are some of the things that Berkshire looks for when it's out there looking to bring another company into the conglomerate?

Woodbury: They look for companies with competitive advantages. So Warren Buffett has said that his favorite time horizon is forever. So, he looks for companies that are going to be able to generate returns in excess of their cost of capital for very long periods of time.

He also wants those businesses to be reasonably priced. So he doesn't want to overpay for these returns that he's going to be getting in the future.

Stipp: So, there is actually a disparate variety of companies in Berkshire, especially on the operating side. So is it that similar themes are running through all of these companies with a competitive advantages, or does he look for bolt-on acquisitions as he's going out and looking for new companies to bring into the fold?

Woodbury: I will say that there is no general theme between them. He likes to let managers run their companies. So once they are bought by Berkshire, they kind of run autonomously. And it's a decentralized operating structure and gives the managers a lot of leeway; it's just that their capital is supplied by Berkshire.

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