Berkshire Hathaway is sitting on US$116bn in cash because it cannot find assets to buy at a sensible price. There are lessons here for Asia’s CFOs, says Cesar Bacani
This article was first published in the April 2018 China edition of Accounting and Business magazine.
Reading legendary investor Warren Buffett’s latest annual letter to Berkshire Hathaway shareholders, I was struck by his observation about the nature of acquisitions today. The purchase of sizeable assets, he wrote, is one of the key building blocks that add value to Berkshire – yet the company is still sitting on US$116bn in cash.
That’s because Berkshire is not willing to pay too high a price for assets, even though it needs them to grow. ‘The key qualities we seek,’ says Buffett, ‘are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.’
The CFO is closely involved in assessing acquisition targets on all these metrics, especially the last. And this is where the challenge lies today. ‘That last requirement proved a barrier to virtually all deals we reviewed in 2017,’ Buffett writes, ‘as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.’
He advances a theory that the CEO job self-selects for ‘can-do’ types who will have no lack of cheerleaders – from subordinates eager for higher compensation to investment bankers ‘smelling huge fees’.
Here is where the CFO’s mettle will be tested. Ideally, they should be the rock that tethers the organisation to reality as everyone in the company gets caught up in a fevered dream. Berkshire CFO Marc Hamburg probably has an easier time of it because Buffett has not lost his head in the current frenzy. But that cannot be said of other boards and CEOs. And guess who gets the blame when the high-priced transaction does not deliver?
The CFO sometimes figures in a lawsuit. Last year, the US Securities and Exchange Commission sued Guy Elliott, CFO of mining company Rio Tinto, for enabling CEO Thomas Albanese (who was also sued) to go ahead with the purchase of a mine in Mozambique despite risks repeatedly flagged by the due-diligence team. In March this year, the Australian Securities and Investments Commission also initiated legal proceedings. ‘Mr Albanese and Mr Elliott failed to exercise their powers and discharge their duties with the care and diligence required by law as directors and officers of Rio Tinto,’ said the watchdog in a statement. The two men deny wrongdoing and are fighting the charges in both countries.
It is true, as advisory firm McKinsey says, that opportunities to buy a company at a price below its intrinsic value are ‘rare and relatively small’. But a premium-priced asset can still be considered ‘sensible’ if a case can be made about reasonable synergies, technology and talent gains and other benefits in the medium term.
The challenge for the CFO and the finance team is to conduct a thorough analysis – and to have the courage to tell the CEO and the board not to go ahead with the transaction when warranted.
Cesar Bacani is editor-in-chief of CFO Innovation
"The CFO should be the rock that tethers the organisation to reality as everyone in the company gets caught up in a fevered dream"