According to Lawrence Cunningham, a corporate director who has written multiple books on Berkshire Hathaway, this deal fits well into the company’s playbook. He told Business Insider (BI) it displays three of the hallmarks of a Buffett deal: “simplicity, durability and mutual benefit.” (1) Occidental has accumulated debt in recent years. Berkshire owns a one-quarter stake in Occidental, so the deal secures the conglomerate a new business while helping Occidental pay off debts and strengthen operations.
A “win-win,” analyst Brett Gardner told BI.
Some of Buffett’s followers are wondering if this is the Oracle of Omaha’s last deal before his planned exit as CEO of Berkshire at the end of the year — the cherry on top of a long, fruitful career. But others, like Gardner, feel Buffett might have time for a “surprise or two” before he steps down.
Is this Buffett's last deal?
Buffett may be preparing to hand over control of Berkshire’s day-to-day operations to his successor, Greg Abel, but the 95-year-old won’t be left completely out of the loop. He’s staying on as chairman of the board.
So, while it’s unknown what lies ahead as the year winds down, it appears that Buffett will continue to work in some capacity. Even after Abel’s transition to the CEO position, the pair may continue to collaborate.
“Greg isn't going to let the best capital allocator of all time sit on the sidelines if opportunities pop up,” Gardner said. Even if Abel has final say on business decisions, that “doesn’t mean [Buffett] can’t be useful.”
Eagle-eyed observers might note, however, that Abel, not Buffett, was the Berkshire executive quoted in the press release announcing the company’s acquisition of OxyChem, underlining the possibility this could be Berkshire’s last big deal under Buffett. (2)
Is value investing for you?
Berkshire investors are hoping to benefit from this deal, while other investors can ponder tenets of value investing by considering the details of this transaction. Essentially, Buffett purchased OxyChem at a relatively low point in Occidental’s financial life, investing in a hopefully brighter future.
Occidental presumably wanted to pay off debts and stabilize its balance sheet, and Berkshire is sitting on hundreds of billions in cash after an enormous stock selloff lately. The infusion of capital on offer might have been seen as a golden opportunity. This put Buffett on the strong side of talks, which may have helped him negotiate favorable terms. It’s likely that he sees extensive value in OxyChem, far beyond the $9.7 billion purchase price, and plans to develop that value over the coming years.
As an individual investor, you likely don’t have billions lying around for deals of this magnitude. But you can seek out companies with stock prices that are lower than their potential value. Those with long-lasting earning potential, solid cash flow and low levels of debt. Good management also helps. The key is to do your homework — finding value takes time and effort, but the payoff can be worth it.
Article sources
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Business Insider (1); Occidental Petroleum (2)
Sarah Sharkey is a personal finance writer who enjoys helping people make optimal financial decisions for their situation. She loves digging into the nitty-gritty details of financial products and money management strategies to root out the good, the bad, and the ugly. Her goal is to help readers find the best course of action for their needs.
