How Berkshire Hathaway Could Spend Its Cash Hoard

By Matthew Frankel Markets Fool.com

As of its most recent quarterly report, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has approximately $85 billion in cash on its balance sheet. Since CEO Warren Buffett has made it clear many times that the company is always on the lookout for new businesses to acquire and new stocks to buy, let's look at what Berkshire Hathaway could buy with its money, and if any of these scenarios are likely to happen.

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What could Berkshire buy with $85 billion?

As I'll discuss in a moment, Berkshire Hathaway is unlikely to use its entire cash hoard on an acquisition. Still, just to put this amount of money into perspective, consider some of the companies Berkshire could buy in cash.

  • CVS Health (market cap $83.2 billion)
  • Morgan Stanley ($81.2 billion)
  • Lockheed Martin ($76.4 billion)
  • Priceline Group ($76.4 billion)

Even when leaving a cushion, the possibilities are huge

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Although it's fun to see what Berkshire could theoretically buy if it spent all of its cash, it's extremely unlikely that the company would deplete all of its reserves. In fact, Warren Buffett likes to keep at least $20 billion in cash on hand at all times, so let's assume that if the right opportunities came along, Berkshire has $65 billion to work with.

Even with this reduced figure, the list of what Berkshire could buy is quite impressive:

  • MetLife ($63.1 billion)
  • Unilever ($61.4 billion)
  • Colgate-Palmolive ($58.4 billion)

Furthermore, if Berkshire decided to use its cash hoard to acquire several companies, check out some of the combinations that are worth less than $65 billion as of this writing:

  • PayPal and Best Buy
  • Target and AutoZone
  • eBay and Tesla Motors
  • Dollar General, Molson Coors, Clorox, and Harley-Davidson
  • Macy's, Twitter, Whirlpool, Ferrari, and Tiffany & Co. -- with nearly $4 billion to spare

Now, I'm not saying that Berkshire would actually be interested in any of these companies -- just that it could buy them. I could argue that Colgate-Palmolive or AutoZone might make sense for Berkshire, if I were giving my opinion on the likely targets from this list, but there's no telling if these businesses would even fall onto Berkshire's radar.

Don't forget about Berkshire's stock portfolio

Finally, while Berkshire prefers to acquire full companies, don't forget that the company is willing to invest substantial amounts of money in common-stock stakes, even if it'll get no control of the underlying company. In fact, Berkshire has cited its willingness to do so as a competitive advantage.

With that in mind, don't be surprised to see Berkshire use some of its cash hoard to add to some of its existing equity stakes or initiate new ones.

What Berkshire looks for

Berkshire's specific process for evaluating investments isn't made public, but the company has provided some guidelines in its annual letters to shareholders. According to the 2014 edition, prospective acquisitions need to meet all six of these criteria:

  1. At least $75 million of pre-tax earnings, or the business must fit into an existing Berkshire business unit.
  2. Demonstrated consistent earnings power.
  3. Good returns on equity, with little or no debt.
  4. Management in place.
  5. Simple business, without a lot of technology.
  6. An offering price.

Obviously, some of these requirements apply to all the companies I mentioned. Most earn more than the $75 million threshold and all have management in place. However, the requirements of consistent earnings power and simple businesses would exclude companies such as Tesla Motors and Twitter, just to name a couple of examples.

The bottom line

To be perfectly clear, the companies I mentioned here are examples of what Berkshire could theoretically buy -- not companies or stocks I think Berkshire will buy. It would be silly to speculate that Berkshire is going to buy any specific companies or stocks -- there are simply too many possibilities to choose from. Rather, the point is that the company is holding $65 billion more than Warren Buffett insists on keeping in reserves, so it's fair to speculate that the company might be doing some shopping in 2017. Exactly what Berkshire buys, however, is anyone's guess.

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Matthew Frankel owns shares of Morgan Stanley. Matthew Frankel and The Motley Fool own shares of -- and The Motley Foolrecommends -- Berkshire Hathaway (B shares), eBay, PayPal Holdings,and Twitter.The Motley Fool owns shares of and recommends Priceline Group and Tesla Motors. The Motley Fool recommends AutoZone, CVS Health, and Unilever.

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