Berkshire Hathaway’s acquisition criteria
In Berkshire Hathaway’s Annual Report 1996, Warren Buffett said in a section under the heading of Acquisition Criteria: “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.”
What are the criteria that Warren Buffett looks for in businesses?
Earlier in the “Acquisition Criteria” section of Annual Report 1996, Warren Buffett said: “We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $25 million of before-tax earnings),
(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).
Warren Buffett went on to say” “The larger the company, the greater will be our interest: We would like to make an acquisition in the $3-5 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.
Recommended reading:
(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition
