Some Insights From Buffett's New Deal

Warren E. Buffett agreed on Tuesday to buy a 60% stake in Marmon Holdings, the industrial holding firm owned by the wealthy Pritzker family, for US$4.5 billion with the goal of eventually owning the entire firm. As part of the deal, Buffett, through his Berkshire Hathaway investment vehicle, will gradually increase his stake in Marmon over the next five or six years until he owns the firm. The final price will be determined by Marmon’s revenues.

#1 The deal represents one of the largest acquisitions Buffett has made in recent memory, especially for a non-insurance company. Buffett has been targeting only insurance and rail companies over the last 5 years, hence the purchase across a number of industries under Marmon is interesting.

#2 Maybe we all should learn from Buffett. The deal was done just the way the Pritzkers and Buffett wanted – no consultants or preliminary studies. I am all for due diligence but not market surveys, cost-benefit analysis, etc. ... you either read the industry/markets correctly or you didn't. You either overpaid or you didn't. No amount of paperwork will help to cushion your views.

#3 Berkshire has some US$47 billion, and despite the minor weakness in US equities, he has not been too eager to put the cash to work (except in his rail stocks). Hence we may expect a few more acquisitions by Buffett in the comin months, and they might not be in insurance anymore.

#4 The Pritzkers are very wealthy, however, they have been selling off their assets in recent years to settle some squabbling inheritance issues. In 2005, the family settled a lawsuit by two grandchildren of Jay Pritzker concerning their family trust. In August, the Pritzkers sold a US$1 billion stake in Global Hyatt, the hotel company they control, to a group of investors including Goldman Sachs.

#5 Who wouldn't want to sell to Buffett? If Warren wants your company, almost everyonewill think your company is grossly undervalued. Hence, you want Buffett in, but also leave some cake for yourself. Hence the 40% stake still resides with the Pritzkers.