Trying to figure out what Warren Buffett will invest in next is no small task. Although, you can bet it will not be small. In fact, he may try to acquire whole companies because anything else might not move the needle when it comes to increasing shareholder value at Berkshire Hathaway (BRK.A / BRK.B).
This post is a follow up to Serious Money: Buffett Looking Beyond Our Borders, where I concluded that Buffett will seek an opportunity to invest in a company that is paying a dividend and has a very easy to understand product or service that will not become obsolete any time soon.
Since "my pal Warren" is unlikely to tip his hand, we are left to our own resources to build a case for the highest probabilities. Through an unimaginable coincidence, I suggested Buffett look at railroad stocks just 24 hours prior to Berkshire's public announcement about its initial buy of Burlington Northern railroad shares.
What's next? What are the clues?
Size will be an acquisition issue. Is there a minimum investment? Yes, there is, and I am going to set the bottom end of the range at $4 billion. This is an educated guess based on several of Buffett's recent transactions. The initial 10% interest in Burlington Northern and the amounts invested in General Electric (GE) and Goldman Sachs Group (GS) are near this figure. The acquisition of Iscar, the privately held Israeli steel fabrication company and his interests in Posco (PKX) do as well.
What might the top range be? Let's start by observing that Berkshire has about $26 billion in cash and short-term investments to play with. He could also use Berkshire stock to include in a major transaction, but he has stated that this would be a rare exception rather than the rule.
Here we can look for guidance in several ways. He will not spend all of his cash and hurt either his credit rating or liquidity for future deals, but he might spend up to half, about $13 billion. Using no more than 50% leverage in any deal would bring Berkshire's size of acquisition back up the $26 billion figure. This happens to be in the same neighborhood as Berkshire's railroad acquisition, said to range somewhere between $26.3 billion and 26.7 billion. Since that was Buffett's biggest deal to date, I think it would be unlikely that the next deal would exceed that by much, if at all.
Because we are considering an investment outside the safety of the United States, I am going to trim this figure down by 10% to about $24 billion. Based on the rational that I have laid out, we have arrived a deal ranging from $4 billion to $24 billion. In searching for potential targets in Berkshire's cross-hairs, this will be the limits.
Look for part three where we add more criteria and reduce the geographic boundaries.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He own shares of BRK.B, GE, and GS.