Would Buffett Buy GE? The Answer Is Not So Simple
- By Rupert Hargreaves
A question I have been thinking about for some time is whether or not Warren Buffett (Trades, Portfolio) will make a bid for U.S. industrial conglomerate General Electric (GE).
Warning! GuruFocus has detected 7 Warning Signs with BRK.A. Click here to check it out.
The intrinsic value of BRK.A
This is not as crazy as it might seem at first glance. Buffett's conglomerate, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), reported a cash balance of $112 billion at the end of 2018, which is more than enough to acquire General Electric in its entirety. After recent declines, the market capitalization of the company is just $86 billion.
That being said, the price is just part of the argument.
Buffett will never buy a business that has suffered so much turmoil and upheaval as General Electric has over the past five years.
Problems of the past
Many of the issues the company is currently trying to deal with date back more than a decade. The company has been a serial acquirer of businesses, often paying top dollar for companies at the top of the market, only then having to write down the value of these businesses relatively soon after the acquisition.
The most prominent recent mistake came in 2016 when the company agreed to combine its oil and gas unit with Baker Hughes. Another mistake, in 2004: GE paid $500 million for a subprime mortgage company called WMC. This business lost more than $1 billion in 2007 alone.
Under the company's previous CEO, Jeff Immelt, GE acquired and divested more than $100 billion worth of business.
And even after recent divestitures, most notably the $21 billion all-cash deal to sell most of its life sciences business, the group is still a sprawling enterprise and one that would almost certainly find itself falling into Buffett's "too hard" pile.
Even if Buffett manages to find some way of understanding all the various parts of the business, GE's $110 billion debt mountain funded pension liabilities will put him off.
It's not that simple
So, I think the answer to the question, "would Warren Buffett (Trades, Portfolio) by GE?" is categorically "no."
But, I wouldn't rule out a deal to buy part of the business because, while many people see GE as a struggling industrial conglomerate, it is made up of hundreds of smaller businesses, some of which are performing significantly better than others.
And as the company tries to reduce its debt load by selling off assets such as these, Warren Buffett (Trades, Portfolio) may be able to pick up some leading industrial companies at fire-sale prices.
The Oracle of Omaha has never been one to turn down a good deal, and this is why I think there is a chance that he could be eyeing up part of the GE empire. Indeed, some of the conglomerate's businesses would fit well into the Berkshire Hathaway empire.
For example, GE Aviation is one of the few companies that dominate the global market for jet engines. This business isn't cash generative yet, but it will be over the next few years because the company sells engines at a loss and then books a profit in the decades after, through lucrative aftermarket parts and service contracts.
For a long-term investor like Buffett, this could be a fantastic investment especially as Berkshire Hathaway already owns aircraft component manufacturer Precision Castparts. GE might be a willing seller as it will get the cash up front, and Berkshire has the resources to wait for profits to start flowing. This is a business with a wide moat and industry-leading position, so it ticks many of the boxes Buffett usually looks for in investments.
GE's renewable energy business might also be attractive for the Oracle of Omaha.
Berkshire Hathaway Energy is already investing billions in renewable energy projects. Through year-end 2017, Berkshire Hathaway Energy had invested approximately $6.5 billion in solar projects, GE's renewable energy business might complrment the existing Berkshire business nicely. With revenues of $10 billion for 2018, Buffett could quite easily afford to buy this division without making too much of a dent in his cash pile.
The bottom line
While I believe that Berkshire Hathaway would not buy General Electric anytime soon, it is not unreasonable to suggest that Buffett might make an offer for some of the struggling conglomerate's business divisions to take advantage of its problems and snap up a good business at a cheap price.
Disclosure: The author owns shares in Berkshire Hathaway.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 7 Warning Signs with BRK.A. Click here to check it out.
The intrinsic value of BRK.A
