Both Bloomberg and MarketWatch are reporting that Warren Buffett is sitting on a $40 billion war chest, and there is increasing speculation that the “Oracle of Omaha” may increase acquisitions through Berkshire Hathaway in light of the recent market conditions. Buffett has already taken advantage of the current climate through investments in:

• Auction-rate securities- Berkshire Hathaway built up a $4 billion position in auction-rate securities in February and March. Auction-rate debt carries yields similar to long-term debt but acts like short-term investments because investors can sell at weekly or monthly auctions, when rates reset.
• High-yield (junk) bonds- Berkshire bought junk bonds in 2002 during the depths of the dot-com bust, and made billions on the positions, according to MarketWatch.
• Derivatives- Berkshire Hathaway owns derivatives contracts that require it to pay up if certain junk bonds default. They expire from 2009 to 2013. According to the company’s latest annual report, the company collected $3.2 billion in premiums on these contracts last year and paid $472 million in losses.
• Bond insurance arm- Berkshire has started its own bond insurer, Berkshire Hathaway Assurance Corp., to participate in the lucrative municipal bond guaranty business.

Other notable investments as of late include $4.5 billion last month for a 60% stake in the Pritzker family’s Marmon Holdings Inc. Just this week, Buffett committed $6.5 billion to help finance chocolate giant Mars Inc.’s takeover of Wm. Wrigley Jr., the world’s biggest maker of chewing gum. Also included in the deal is $2.1 billion for a minority holding in Wrigley that Berkshire will get at an unspecified discount, according to Bloomberg.

Still, Buffett has been noticeably absent from the bailouts of struggling financial institutions in recent months, according to MarketWatch’s Alistair Barr yesterday. He added that the Omaha-based investor has also avoided the purchase of complex mortgage-related securities such as collateralized debt obligations (CDOs), which have been among the hardest hit investments during the credit crunch. Barr wrote:

For some Berkshire shareholders, that suggests Buffett may be waiting for markets to deteriorate further before making major acquisitions or investments.

“It’s very, very telling that he has not made any investments,” said Whitney Tilson, head of hedge fund firm T2 Partners LLC and a Berkshire investor. “Every major pool of capital in the world has made big investments in distressed financial institutions. He’s seeing every deal, so why hasn’t he done one? Maybe because he thinks things will get a lot worse.”

Barr added:

Indeed, Buffett told Fortune magazine in early April that the markets and the U.S. economy may be a long way from turning a corner.

“It seems everybody says it’ll be short and shallow, but it looks like it’s just the opposite,” he said.

In the meantime, Buffet will continue to look for bargain outfits, most notably in Europe, where he will be conducting a four-city tour starting May 19. Bloomberg’s Josh Hamilton wrote this morning:

Buffett has said in recent years that investments meeting his criteria and big enough to make a difference to Berkshire have become scarce, prompting him to look abroad. He said at last year’s annual meeting that he would welcome a $40 billion to $60 billion deal. Buffett also has said he expects the dollar to depreciate, making earnings in other currencies more important.

Photo by Ove Tøpfer, stock.xchng

Sources:

“Buffett gets a crisis to put Berkshire’s cash to work”
Alistair Barr
MartketWatch, May 1, 2008

“Buffett Plots Buying Spree as Crunch Diverts Bidders (Update1)”
Josh Hamilton
Bloomberg, May 2, 2008

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