Last November I wrote a Real Money column positing that Warren Buffett and Berkshire Hathaway (BRK.B) should buy General Electric (GE) and "put the company out of its misery." Well, GE shares have fallen another 25% since I penned that article, and the misery is rarely interrupted.
One brief respite came Tuesday, though, as GE shares jumped on trading desk rumors of interest in GE by, you guessed it, Buffett's Berkshire. There was no independent confirmation of those rumors and GE shares resumed their decline -- in a buoyant market -- Thursday, but I am still wondering, to paraphrase Gertrude Stein, if there is any "there there."
Berkshire has been so darn boring in the past year-and-a-half, with no significant acquisition since August 2016's purchase of Precision Castparts. The size and scope of the conglomerate has barely changed, and while investors focus on Berkshire's equity holdings like Apple (AAPL) and Wells Fargo (WFC) , it is the conglomerate's operating businesses -- Burlington Northern Santa Fe, GEICO and the reinsurance businesses, McLane food distribution, etc. -- that generate the operating cash flow. That cash flow, plus dividends from Berkshire's holdings in other publicly traded companies has built Berkshire's cash hoard to an astounding $116 billion as of Dec. 31, 2017.
That's too much cash, and the returns on that cash -- though increasing as LIBOR hit another 52-week high Thursday -- are still far below what a Benjamin Graham student (as Buffett was) would expect from an investment in equities.
So, if Buffett wants GE, he has two options. His asset management team, led by Todd Combs, could begin accumulating a position in GE shares. The issue is one of materiality, as Berkshire has a concentrated portfolio.
From Berkshire's 2017 10-K:
Approximately 65% of the aggregate fair value was concentrated in five companies (American Express Company (AXP) - $15.1 billion; Apple Inc. - $28.2 billion; Bank of America Corporation (BAC) - $20.7 billion; The Coca-Cola Company (KO) - $18.4 billion and Wells Fargo & Company - $29.3 billion)
So, to even "notice" a GE position, Combs and co. would have to accumulate a $15 billion stake. GE's market capitalization has dwindled to a current level of $116 billion, and thus to hit Berkshire's top five, BRK would have to buy 13% of GE. I don't care how good you are, no trader can do that stealthily, and accumulating a position as shares are rising only works when they don't stop rising.
But, wait, the last few paragraphs showed an astonishing coincidence. GE's market value of $116 billion equals the $116 billion of cash on Berkshire's balance sheet! So, is it a perfect match?
Berkshire could handle GE Capital's legacy issues, and GE's underfunded pension liability would seem like a rounding error on Berkshire's corporate balance sheet. GE Aviation fits well with Precision Castparts, GE's Healthcare division would give Berkshire the tech knowledge its current businesses so obviously lack, and there is no way Berkshire's co-Presidents -- Ajit Jain and Gregory Abel -- could mismanage GE's Power division any more than have the confederacy of dunces that have run General Electric for the past decade.
So, I'll say it again. GE fits with Berkshire. Am I buying GE shares on this prospect? No. But, as I said in November, stranger things have happened.
I'll keep watching the smoke signals from Omaha over the next few weeks, and you should be watching them, too.