Buffett’s Acquisition Criteria

Shareholder Letter

Buffett’s acquisition criteria was disclosed many times through Buffett annual shareholder letter and the company’s website over the past 40 years. This article will sort out four of the more important annual shareholder letters for readers one by one.

1982 shareholders letter

This annual report is read by a varied audience, and it is
possible that some members of that audience may be helpful to us
in our acquisition program.

We prefer:

  • (1) large purchases (at least $5 million of after-tax earnings),
  • (2) demonstrated consistent earning power (future projections are
  • of little interest to us, nor are “turn-around” situations),
  • (3) businesses earning good returns on equity while employing little or no debt,
  • (4) management in place (we can’t supply it),
  • (5) simple businesses (if there’s lots of technology, we won’t
  • understand it),
  • (6) an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

We will not engage in unfriendly transactions. We can promise complete confidentiality and a very fast answer as to possible interest – customarily within five minutes. Cash purchases are preferred, but we will consider the use of stock when it can be done on the basis described in the previous section.

2014 shareholders letter

As an appendix, Buffett disclosed Berkshire Hathaway’s acquisition criteria publicly as below:

BERKSHIRE HATHAWAY INC. ACQUISITION CRITERIA
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

  • (1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
  • (2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
  • (3) Businesses earning good returns on equity while employing little or no debt,
  • (4) Management in place (we can’t supply it),
  • (5) Simple businesses (if there’s lots of technology, we won’t understand it),
  • (6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.

We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer – customarily within five minutes – as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don’t participate in auctions.

Charlie and I frequently get approached about acquisitions that don’t come close to meeting our tests: We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me.”

2017 shareholders letter

There are four building blocks that add value to Berkshire:

  • (1) sizable stand-alone acquisitions;
  • (2) bolt-on acquisitions that fit with businesses we already own;
  • (3) internal sales growth and margin improvement at our many and varied businesses; and
  • (4) investment earnings from our huge portfolio of stocks and bonds. In this section, we will review 2017 acquisition activity.

In our search for new stand-alone businesses, the key qualities we seek 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.

2019 shareholders letter

We constantly seek to buy new businesses that meet three criteria.

  • First, they must earn good returns on the net tangible capital required in their operation.
  • Second, they must be run by able and honest managers.
  • Finally, they must be available at a sensible price.

When we spot such businesses, our preference would be to buy 100% of them. But the opportunities to make major acquisitions possessing our required attributes are rare. Far more often, a fickle stock market serves up opportunities for us to buy large, but non-controlling, positions in publicly-traded companies that meet our standards.

Whichever way we go – controlled companies or only a major stake by way of the stock market – Berkshire’s financial results from the commitment will in large part be determined by the future earnings of the business we have
purchased. Nonetheless, there is between the two investment approaches a hugely important accounting difference, essential for you to understand.

Why is it important?

These standard rooms announced by Buffett may be slightly different, but the main focus and spirit are almost the same. Among them, the standards published in the 2014 shareholder letter and the 1982 shareholder letter l are even exactly the same. The only difference between the two is the annual pre-tax and after-tax earnings. Readers can carefully study these four shareholder letters and gain a deeper understanding of Buffett’s investment principles.

Buffett's Acquisition Criteria

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