Via Financial Times

When Tiffany & Co was looking for an alternative suitor after receiving a takeover approach from LVMH, the US jeweller turned to a longtime admirer: Warren Buffett.

But although Mr Buffett had bailed out Tiffany during the financial crisis, he politely rejected its advances this time, according to people briefed on the matter. Mr Buffett confirmed the conversation took place.

That cleared the way for LVMH to press ahead with its acquisition of Tiffany in November, eventually agreeing to pay $16.6bn, including debt, after raising its bid to win board approval. 

It also left Mr Buffett’s Berkshire Hathaway in a familiar position: sitting out a blockbuster deal.

The company has not made what its 89-year-old founder calls an “elephant-sized acquisition” for four years, and its cash pile has swollen to a record $128bn, earning little interest with rates near historic lows and acting as a drag on profits.

The cash building on the Berkshire balance sheet now represents nearly a quarter of its market capitalisation and provides enough firepower to buy all but a few dozen of the companies on the S&P 500.

Class-A shares of Berkshire have gained 11 per cent this year, trailing the 31.5 per cent rise of US stocks with dividends invested, making 2019 the company’s worst year in a decade in comparison with the broader market. 

“There are investors that are frustrated,” said Jim Shanahan, an analyst with investment company Edward Jones. “He’s flush with liquidity and will be ready when opportunities emerge, but we need a pullback here for those opportunities to emerge.”

Column chart of Berkshire Hathaway share price relative to S&P 500 (percentage point difference) showing Buffett's worst year in a decade

Since agreeing to pay $32bn for Precision Castparts in 2015, the doyen of the investing world has warned his shareholders repeatedly that he may struggle to clinch another big acquisition, saying in his annual letter in February that “prices are sky-high for businesses possessing decent long-term prospects”.

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Mr Buffett has long admired Tiffany as a potential acquisition, according to bankers who have advised him, and he bought $250m of bonds when the retailer was in distress after the 2008 financial crisis. Tiffany would have complemented Borsheims, the Nebraska jeweller Berkshire acquired 30 years ago, to which shareholders flock during Mr Buffett’s annual meeting in Omaha.

Filings from Tiffany last week showed that the jeweller’s advisers at Centerview and Goldman Sachs approached four potential alternative bidders but none was interested in outbidding LVMH. The filings did not name Mr Buffett or the other potential bidders.

One of the few options Mr Buffett found appealing this year was a $10bn investment in Occidental Petroleum, a deal that funded the oil group’s takeover of Anadarko Petroleum. While not considered an “elephant” — it was not a takeover, but rather an investment in new preferred shares and warrants — it did pay Berkshire a handsome $800m annual dividend.

Record high stock prices have inflated the type of cheap, overlooked companies that Mr Buffett — an ardent value investor — has built a fortune purchasing at bargain prices. He has had to adapt his approach.

In November, Mr Buffett quietly bid $5bn on technology distributor Tech Data after he received word from Bank of America that the company was planning to sell itself to private equity behemoth Apollo Global Management. Apollo ultimately sweetened its bid, and Mr Buffett, who is known for being loath to enter auctions for publicly traded companies, backed away.

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“There’s a lot of capital on the sidelines,” said Mr Shanahan. “Private equity firms have a lot of capital to put to work and they’re willing to be more aggressive than he is.”

Tiffany & Co....**FILE** In this May 30, 2008 file photo, a customer holds up gift he purchased at Tiffany & Co. in San Francisco. Jewelry retailer Tiffany said Thursday, Aug. 28, 2008, second-quarter profit doubled, beating Wall Street expectations as sales rose by double-digit percentages in Asia and Europe. (AP Photo/Paul Sakuma)
LVMH secured the takeover of Tiffany after upping its bid to $16.6bn, including the assumption of debt © AP

Mr Buffett has also softened his approach to buybacks, acquiring Berkshire’s own stock, and widened the net for buying shares of other blue-chip companies. 

In 2016, two of Mr Buffett’s investing deputies, Todd Combs and Ted Weschler, bought Apple shares, an eyebrow-raising move since their boss had long shunned technology companies. Berkshire has slowly built the stake and today the $72bn position is the group’s largest public equity holding. Berkshire also bought a stake in Amazon earlier this year, an investment valued at $930m in a November regulatory filing.

For some Berkshire investors, many of whom agree the US stock market is overpriced, Mr Buffett’s patience is welcome.

“Buffett has the luxury to move slowly on purchases because of Berkshire’s cash hoard,” said Berkshire investor Bill Smead, of Smead Capital Management. “Shareholders will benefit tremendously when he puts that money to work.”