OMAHA, Neb. » Warren Buffett’s company said yesterday it will spend about $9 billion cash to add specialty chemical maker Lubrizol Corp. to the eclectic mix of businesses inside Berkshire Hathaway Inc.
The purchase may help satisfy Buffett’s appetite for large acquisitions to boost Berkshire’s earnings power, but the deal is still significantly smaller than last year’s $26.7 billion acquisition of the Burlington Northern Santa Fe railroad.
"Lubrizol is exactly the sort of company with which we love to partner — the global leader in several market applications run by a talented CEO, James Hambrick," Buffett said in a statement.
Two years ago, Berkshire invested $3 billion in preferred shares of Dow Chemical to help finance Dow’s $16.5 billion purchase of specialty chemical maker Rohm & Haas. That deal likely gave Buffett insight into the high-margin specialty chemical business.
In yesterday’s deal, Berkshire will pay $135 per share, a 28 percent premium to Lubrizol’s closing stock price Friday of $105.44. The transaction also includes about $700 million in net debt.
Lubrizol, of Wickliffe, Ohio, makes chemicals for pharmaceutical companies, fuel additives for gasoline and diesel, and other ingredients for the transportation sector. Last month, it reported that its fourth-quarter profit climbed 17 percent because of a $19 million tax benefit and higher sales. The company’s revenue grew 11 percent to $1.32 billion.
Berkshire already owns a conglomerate of more than 125 manufacturing and service businesses called Marmon Holdings that may use some of Lubrizol’s products. Marmon’s businesses serve the transportation, energy and construction markets, and Marmon makes products ranging from railroad tank cars to metal fasteners.
Buffett biographer and Berkshire shareholder Andy Kilpatrick said he thinks Lubrizol will be a good fit because it appears to be a solid company.
"He’s paying a reasonable premium, and he’s getting an entire business with a brand name," said Kilpatrick, the stockbroker-author of "Of Permanent Value: The Story of Warren Buffett."
Stifel Nicolaus analyst Meyer Shields said Lubrizol should complement Berkshire’s other businesses, and the deal wasn’t surprising after Buffett’s comment in his shareholder letter about actively hunting for acquisitions.
But Shields said Berkshire shareholders may have been better off, especially in the near future, if Berkshire would simply return some of its cash to shareholders in the form of a dividend instead of acquiring Lubrizol.
"There’s no real economic benefit being created by these sort of transactions as far as I can tell," said Shields, who maintains a "Hold" rating on Berkshire’s stock. "If you really can’t find anything to do with your cash, it’s perfectly OK to not do anything with your cash. Give it back."
Berkshire finished 2010 with about $38 billion cash on hand, so it had the resources ready for a deal. Buffett has never issued a dividend at Berkshire because he believes he can generate a greater return for shareholders by reinvesting the money.