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Monday, March 14, 2011

Why did Berkshire Hathaway Buy Lubrizol for $9 Billion

Berkshire Hathaway announced on Monday that it would buy Lubrizol for $9 billion in cash – making it one of Warren Buffett’s largest deals ever.

Berkshire is paying $135 a share for the Indiana specialty chemical maker. The price represents a 28 percent premium to Lubrizol’s closing price on Friday.

“This transaction provides compelling value to our shareholders and is a clear endorsement of the growth and diversification success Lubrizol has achieved,” James Hambrick, chief executive officer, in a statement. “We are very excited to have the opportunity to become part of the Berkshire Hathaway family.”

The Oracle of Omaha, in his latest investment letter, indicated that he was on the hunt for major acquisitions. “We’re prepared,” he wrote. “Our elephant gun has been reloaded, and my trigger finger is itchy.”

And Lubrizol fits much of Mr. Buffett’s deal-making criteria. It’s a large company, with earnings of $732 million in 2010. Those earnings are relatively consistent, too. The product is to easy to understand: Lubrizol makes goods global transportation, industrial and consumer markets like fuel additives for gasoline and diesel. The management team has been in place for awhile, too – another core tenet of the billionaire investor’s strategy. Mr. Hambrick joined the company in the 1970s while still in school, and was named CEO in 2004.

“Lubrizol is exactly the sort of company with which we love to partner – the global leader in several market applications run by a talented CEO, James Hambrick,” Mr. Buffett said in a statement. “Our only instruction to James – just keep doing for us what you have done so successfully for your shareholders.”

That Mr. Buffett is using cash to buy Lubrizol may indicate he thinks Berkshire is undervalued. In a prior annual letter, he lamented the use of stock in the purchase of the Burlington Northern Santa Fe Railway, saying he enjoyed issuing shares as much as “prepping for a colonoscopy.”

“The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we ’sell’ a significant part of the company at that same inadequate price by issuing our stock in a merger?” Mr. Buffett wrote. “If an acquirer’s stock is overvalued, it’s a different story: using it as a currency works to the acquirer’s advantage.”

At a recent price of $128,000, shares of Berkshire are still way off their 2008 peak of $147,000.

The Essays of Warren Buffett: Lessons for Corporate America, Second Edition

Citigroup and Evercore Partners advised Lubrizol on the deal, while the company’s legal counsel was Jones Day.
Buffett's Bites: The Essential Investor's Guide to Warren Buffett's Shareholder Letters
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