Why Did Warren Buffett Offer To Buy Heinz At A 20% Premium?


Stocks were up 0.07%
Bonds were up 0.12%
US Dollar was up strong, up 0.35% versus a basket of world currencies, and up very strong 0.66% versus the Euro.
Asian stocks were up, but European stocks were down on news their economies contracted in the 4th quarter of 2012.
Gold was down -0.53%, to a new 6 month low.
Oil was understandably up 0.40% – after new positive economic news in the US.

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Good US Economic News

This morning it was reported that recent US residential home foreclosures and jobless claims fell more than expected.

Berkshire Hathaway Offers To Buy Heinz

Warren Buffett, today in offering to buy Heinz at a price 20% over its previous market price, is likely saying Heinz’ previous share price was undervalued.

If you did not know, Buffett has a history of buying and owning companies that make specialized sugar-delivery products to consumers. Berkshire Hathaway, has previously purchased and still owns major positions in Wrigley’s, Coca-Cola, and See’s Candies.

How can an average person profit from learning something about Buffett’s decision today? What can be inferred that might help an average person become wealthier?

Contrary to what today’s investing headlines’ questions’ imply, I don’t think the move suggests the entire stock market is undervalued. I don’t know whether Buffett thinks stocks in general are undervalued.

The move more likely supports Buffett’s long-held, and handsomely-rewarded belief that: Companies that can add value to fairly simple ingredients, through effective formulation, packaging, supply-controlled branding, and marketing will tend to compound in value much faster than the US Dollar over the long run.

If that inference is correct, then owning stocks in those kinds of companies, should create more financial return for investors over the long run, more than simply holding onto cash.

Another valuable principle Buffett’s purchase implies to the average person is a principle I’ve emphasize with friends and family before: Buffett today didn’t buy a “low priced” stock share, hoping it would become a “high priced” stock share over the long term. Equally or more important:

Buffett bought a controlling interest in the company.

By owning a controlling interest in the asset (company) he purchased, if the fundamentals of that industry or that specific company change, he can control how the company adapts and he can even control how, or to whom, his interest in the company is sold.

This is an important “ownership principle” for any person: Controlling the liquidity and use of the assets you “own” are key rights of ownership. If you “own” an asset, but cannot control its use or how it is sold, then you don’t fully (and possibly effectively) own the asset; rather, in that case, you “own” the liabilities for the asset without “owning” the ability to respond to developing liabilities.

Buffett believes that with the ability to control Heinz, the profitability of Heinz, even at a price 20% more than its previous share price, will continue to increase faster than cash.  He bought it because he anticipates the company, as a profit engine, will keep sufficient pace with the other companies within Berkshire Hathaway.

Berkshire Hathaway, after spending over $20 billion on this Heinz acquisition, is still not cash poor. Berkshire still has billions (and constantly growing) in cash, looking for their next acquisition.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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