Article:
http://www.nationalpost.com/todays-paper/Buffett+puts+deal+engine/4439806/story.html
Summary:
The article revolves around Berkshire’s recent investments from the acquisition of Lubrizol Corp. to the order of approximately 120 Bombardier Inc. planes. Berkshire has decided to acquire Lubrizol Corp. by means of purchasing Lubrizol’s shares with cash at US$135, approximately 28% more than the closing price on March 11. Immediately after the news release of Berkshire’s acquisition, Lubrizol’s share price increased by 27%. Through the purchase of Lubrizol, a maker of engine lubricants, Berkshire can fuel its current investments on cars, trucks, freight railroads, and luxury jets. In addition, Berkshire has decided to purchase approximately 120 Bombardier Inc. planes in an attempt to rebound in luxury travel. Moreover, firms will soon invest into fuel products that improve transportation efficiency due to the significant increase in fuel prices as stated by Meyer Shields, a Baltimore based analyst.
Connection:
The recent US $9-billion acquisition of Lubrizol Corp. by Berkshire would cause a decrease in the cash flow statement. As a result, the Purchase of property, plant, and equipment account, under investing activities, will have a negative value of $9 billion because Warren Buffet’s Berkshire will acquire Lubrizol Corp’s share in terms of cash at $135 a share. The 27% increase in Lubrizol’s share value after the acquisition by Berkshire could potentially lead to the distribution of dividends depending on the Lubrizol’s shareholder’s decision. The value of dividends per share can be calculated by adding net income to the difference of the beginning and ending retained earnings, all divided by the number of shares issued. In addition, Berkshire’s NetJets Inc. filed an order for approximately 120 Bombardier Inc. planes on March 2 which would result in an overall decrease in the cash account and an increase in the NetJets Inc.’s capital assets with respect to the total value of the ordered planes. Moreover, as time passes, the accumulated amortization account would increase due to the annual depreciation of the company’s capital assets such as the Bombardier Inc. planes.
Reflection:
From my perspective, I believe that Berkshire’s acquisition of Lubrizol Corp is definitely beneficial Berkshire. Not only can Berkshire reduce its fuel and lubricant expenses for its current investments in transportations which include cars, trucks, freight railroads, and even jets, it can also take advantage of the increasing demand for engine lubricants and fuel as shipping of goods increase around the world. However, despite the recent increase of 27% in Lubrizol’s share value after the acquisition, the likelihood of dividends distribution by Berkshire towards the end of the year is highly unlikely. Berkshire has a reputation of conserving cash dividends; in fact, Berkshire has not authorized a dividend to its shareholders since 1967. Personally, I would not invest into Berkshire due to the minute profit, high share price value, and the lack of dividends. Despite the large scaled acquisition of Lubrizol, the second largest acquisition the recent decade by Berkshire, the reduction of $9 billion in the company’s cash flow should not affect the company’s day to day operation since the company is in possession of approximately $40 billion cash. With the excess reservoir of cash, Berkshire can continue to invest into what it seems beneficial to both the company and shareholders. However, Berkshire should conserve a portion of its cash for emergencies, investment failures, or future economic crisis.
