Warren Buffett made his name as a stock picker, investing in big-name brands such as Coca-Cola and American Express and running his company, Berkshire Hathaway, like a mutual fund.
These days, Berkshire looks a lot different, as Buffett has transformed it into something of an industrial conglomerate built not on well-known stocks but on big deals to buy lesser-known companies.
That shift was highlighted Monday as Berkshire announced it would buy Portland, Ore.-based Precision Castparts for $37.2 billion including debt. The company makes specialized parts for airplanes and generators, including bolts and engine blades.
The deal is one of the largest of 2015, a busy year for mergers and acquisitions, and it’s also one of the largest in Berkshire’s history. The acquisition, which requires approval from shareholders and regulators, is expected to close in the first quarter of 2016.
Shares of Precision Castparts stock surged on the news, rising 19.1 percent to close at $230.92, while Berkshire Hathaway stock was mostly flat, closing down slightly.
The buyout has the hallmarks of a Berkshire deal, company followers say. Precision Castparts is held to exacting standards in a complicated business, making it hard for competitors to emerge. The energy industry’s recent struggles have pushed its stock price down, but it’s still hugely profitable, netting $1.5 billion last year on $10 billion in sales. And it appears well managed, said Meyer Shields, an analyst at investment banking firm Keefe, Bruyette & Woods.
“I’ve admired PCC’s operation for a long time,” Buffett said in a statement. “For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.”
The deal puts to use some of the $60 billion in cash Berkshire Hathaway has piled up in the years since its last big acquisition, when it bought BNSF Railway in 2009. The company also bought half of Heinz in 2013.
The acquisition is also likely to put Precision in an elite spot within Berkshire’s portfolio, what Buffett calls his “powerhouse five” of mostly specialized, industrial companies.
The five — Berkshire Hathaway Energy, BNSF, International Metalworking Cos., Lubrizol and Marmon — are hardly household names, but Buffett has described them to investors as a “sainted group.” They include a conglomerate of power companies, a railroad, and manufacturers that make things such as metal-
cutting tools, chemicals and wire.
Like Precision Castparts, they’re mostly new to Berkshire. Four of the five were bought out within the past decade, highlighting the strategic shift Buffett and his colleagues have maneuvered.
That shift doesn’t necessarily mean Buffett is changing his thinking, said Lawrence Cunningham, a George Washington University professor and author of “Berkshire Beyond Buffett,” but it shows that as the company and its subsidiaries have grown, he’s been able to negotiate bigger deals.
Buffett won his reputation as the “oracle of Omaha” by investing the money policyholders paid his insurance business, mostly by buying stocks but occasionally by acquiring smaller companies such as See’s Candies and Nebraska Furniture Mart, Shields said.
But as the company has grown, it has been loath to pay its investors dividends, instead building piles of cash that have allowed it to target larger and larger deals. With Precision Castparts, Berkshire will own outright 10 companies that would be Fortune 500 companies if they stood alone, not including its stake in Heinz.