David Sokol has resigned from Berkshire Hathaway, and there are questions about his trading in Lubrizol, a company that Berkshire Hathaway just acquired.
What is Lubrizol, and what is the deal about?
Here’s a quick description from Canaccord Adams published March 15:
Warren Buffett’s Berkshire Hathaway announced Monday it would buy industrial chemical maker Lubrizol for $9 billion in cash, a 28% premium to the company’s Friday close.
The deal is Berkshire’s biggest since buying railway Burlington Northern Santa Fe for more than $26 billion in late 2009. It extends the trend of Berkshire expanding into basic industries, and indeed satisfies many of Buffett’s investing criteria. As the New York Time’s Deal Book points out, Lubrizol is a large company that consistently reports good earnings, recording a profit of $732 million in 2010. Further, Lubrizol’s products are easy to understand: it makes goods for the global transportation, industrial and consumer markets, including fuel additives for gasoline and diesel. Lubrizol’s management team has been in place for a while, too, with CEO James Hambrick joining the company in the 1970s, and named head in 2004. In sum, 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,” said Buffett. “Our only instruction to James – just keep doing for us what you have done so successfully for your shareholders.”
Importantly, analysts think the fact Buffett is using cash to buy Lubrizol may indicate he believes Berkshire is undervalued. The investment firm has more than $38 billion in reserves, and has indicated it is on the hunt for major acquisitions. In its annual letter to investors, Buffett wrote, “We’re prepared…Our elephant gun has been reloaded, and my trigger finger is itchy.” Having just closed Berkshire’s biggest deal in a few years, Buffett is clearly a man of his word, but could he pull the trigger again?
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