Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has had a cash problem for some time now. Simply put, its businesses have been generating cash quicker than Warren Buffett and the rest of Berkshire’s team can figure out ways to put it to work. While the first quarter saw the cash stockpile decrease for the first time in a while, there’s still almost $109 billion in cash on Berkshire’s balance sheet.
There are 5,179 stocks listed on the NYSE and NASDAQ stock exchanges as of June 1, 2018. Of these companies, only 60 have a market capitalization greater than $109 billion, meaning that Berkshire Hathaway could theoretically buy any of the 5,119 other publicly traded companies with the cash it currently has on hand.
What’s more, Berkshire has excellent borrowing ability. Vice Chairman Charlie Munger has estimated that Berkshire could complete a $150 billion acquisition if the company really wanted to. This means that all but 42 of all NYSE- and NADSAQ-listed companies are within Berkshire’s reach — including names like Walt Disney, McDonald’s, and Nike, just to name a few. And also keep in mind that this only includes publicly-traded companies — there are thousands of additional candidates among private companies.
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How much does Berkshire actually want to spend on an acquisition?
To be fair, Buffett indicated that he feels Munger’s $150 billion figure is a bit ambitious. Furthermore, Buffett is unlikely to spend all of Berkshire’s cash. Buffett likes to keep at least $20 billion in reserves at all times, and in a recent CNBC interview said that he would be happier if the company’s cash hoard was at $30 billion.
So, realistically Buffett could potentially spend roughly $80 billion on an acquisition, or on a combination of smaller transactions. This is still a massive amount of money burning a hole in Buffett’s pocket. Just to give you an idea of what this means, ConocoPhillips, Lowe’s, Time Warner, and FedEx all have market capitalizations below Berkshire’s spendable cash.
A few of the strongest possibilities for Berkshire’s cash hoard
I don’t necessarily think Buffett will buy any of the companies I’ve mentioned — my point has been simply to illustrate what a massive amount of buying power Berkshire’s team has.
On the other hand, there are some opportunities that I would consider to be among the most likely uses of Berkshire’s cash. Just to name a couple:
Buffett could use Berkshire’s cash to acquire an entire airline. Berkshire currently has stakes in the four largest U.S. airlines, all of which are in the ballpark of 10% of the outstanding shares. After years of speaking negatively of the airline business, Buffett has said that the industry fundamentals have shifted, and has indicated that owning an entire airline is certainly a possibility. Plus, there are some clear parallels between Buffett’s current airline investments and Berkshire’s railroad investments several years ago that the company held before acquiring BNSF Railroad in its entirety. Here’s a look at Berkshire’s current airline investments:
Shares Owned by Berkshire
Berkshire Stake (% of outstanding stock)
American Airlines Group (NASDAQ: AAL)
Delta Air Lines (NYSE: DAL)
Southwest Airlines (NYSE: LUV)
United Continental Holdings (NYSE: UAL)
Data source: Berkshire Hathaway 13-F filings. Market capitalization as of 6/1/18.
There’s no way to know which, if any, Berkshire has its eye on, but the takeaway is that any of the four would likely be easily affordable. To be sure, Berkshire would likely pay a significant premium over each airline’s share price to acquire the remaining stock, but even the most valuable of the four (Delta) would likely use up less than half of Berkshire’s spendable cash.
Another possibility for Berkshire’s cash would be to acquire a larger stake in Apple (NASDAQ: AAPL). The iPhone maker is already Berkshire’s largest stock position, but Buffett has said in a recent interview that he’d like to own the entire company. While Apple is one of the few companies that is way too valuable for Berkshire to acquire, Buffett could certainly decide to substantially increase Berkshire’s stake using the company’s available cash.
A good problem to have, but still a problem
One final point to address is why Warren Buffett and his team consider such a massive amount of cash to be a problem.
To be clear, having a twelve-figure stockpile of cash isn’t the worst problem to have. For one thing, it gives Berkshire the financial flexibility to not only survive market downturns, but to capitalize on them. In fact, it was Berkshire’s cash that allowed it to make particularly savvy investments during the financial crisis.
The problem is that there is such a thing as too much cash, from an investor’s perspective. It’s nice to have a certain degree of financial flexibility, but Berkshire has about $80 billion beyond what it considers a smart amount of cash to hold. This is $80 billion that is earning little or no returns, instead of being put to work to earn more money for shareholders.
Even so, Buffett isn’t going to use the cash hoard on just anything, so it could still take some time for a large acquisition to materialize. However, if the first quarter was any indication, it seems like Buffett is starting to like the market conditions and could be more willing to make a big deal than he has been in recent years.
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Matthew Frankel owns shares of Apple, Berkshire Hathaway (B shares), and FedEx. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Nike, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.
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