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By Jason Stipp | 04-29-2011 08:00 PM

Weighing Berkshire's Acquisition Prospects

Are Berkshire's best acquisition days behind it? Berkshire authors weigh in.

Jason Stipp: I am Jason Stipp for Morningstar. We're here at the 8th Annual Value Investor Conference in Omaha, and we're talking to some Buffett experts and authors about Berkshire's acquisition prospects. Are the company's best acquisition days behind it?

Scott Phillips: Perhaps, we'll just have to wait and see. He is so willing to step into crisis situations, and I imagine [they will be] more opportunistic in that light, and step into voids and other future crisis to make smart acquisitions. So, that would probably be the way, if I were in his shoes, I would try to handle that situation.

John Price: I remember Warren saying some years ago that when he looked back over his record, he actually found that his best acquisitions, the ones that performed the best, were actually the biggest acquisitions, because the bigger they are, he seemed to be implying, they did a lot more work on doing all the due diligence. So, I think there is plenty of life there left.

Vitaliy N. Katsenelson: I think the Burlington Northern acquisition was a great example, that basically the bigger you get, the lower return you're going to get. Burlington, if you look at how much he paid for it, that was a fully valued stock. If he gets 5% return on investment, that's probably as good as it gets. So yes, I think that's probably the biggest problem Berkshire has, is that at this size, he needs to make much [bigger] acquisitions, and therefore the universe is lot smaller. Therefore returns are going to be much lower as well.

Robert Miles: Well, I do think that the number of opportunities in publicly traded companies, the pool available to Berkshire Hathaway, has shrunk to about maybe 200 companies that could move the needle significantly with a company that's generating $1 billion in cash flow in a month.

I think at some point, Berkshire Hathaway would consider a dividend and begin returning some of the excess cash to its shareholders if they are not able deploy capital. But his most recent acquisition, Burlington Northern, is now the biggest earner of all the subsidiary companies of Berkshire Hathaway. It, in just 10 months of last year, earned pre-tax $3.6 billion, and Warren said in his letter that it represents 40% of the pre-tax earnings of Berkshire Hathaway.

So there is an example of its most recent purchase being able to significantly increase shareholder value, and I'm glad he had the cash to do it.

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