Warren Buffett just made his biggest business deal ever, agreeing to buy Portland-based Precision Castparts for $32.4 billion in cash. Is Precision in cloud technology, an industry that attracts over 50% of venture capital? Is it in genetics, robotics, or space--all really hot niches right now?
No--it's in parts. Yes, real parts--greasy hunks of metal that roll around on your garage floor, or, in the case of this company, roll around hangar floors at Precision's top customers like Airbus, Boeing and Rolls Royce.
Buffett's contrarian investing pattern has made owning stock in Berkshire Hathaway legendary. What does he look for in an acquisition? It's so simple you may not even think about it, but you should. As your own company grows, acquisitions and investments are increasingly a part of entrepreneurial strategy.
What can you learn from Buffett in this bold deal? Look for these five things:
Precision earned $1.53 billion on $10 billion in sales last year. That's a healthy bottom line. If you want to make money, invest in businesses that are making money. With 127 locations and over 29,000 employees, Precision has been able to clear a billion for five years in a row.
2) Return on equity.
Precision makes money for its owners. Even though it has issued some bonds, the business is not highly leveraged with debt. In layman's terms, it really makes money it returns to his owners, not to its lenders. It earns real cash.
3) Solid management.
While a lot of companies make their money stripping down a company operationally and replacing management, Berkshire tends to keep management in place. The CEO at Precision has been there 27 years and has right hand people that also have logged decades in their parts business.
Sexy investments are over priced almost by definition. Great investors like Buffett look for niches the market hasn't explored yet or does not fully value--the "undervalued overachievers" principle I also use in reviewing opportunities at Valor Ventures, my venture capital firm. Berkshire's earnings come from railroad, utilities, industrial manufacturers (now like Precision Castparts), branded food, and home builders. These are "staple" industries that don’t go in and out of style. How do you know it’s not sexy? No one gets excited when you talk about it!
Buffett had to borrow to do this deal–and did it anyway. He didn’t wait to see what the market might do later, or wait for a better share price. When you see the right market opportunity, make the move.