market folly

Warren Buffett's Berkshire Hathaway is set to acquire Precision Castparts (PCP) for $37.2 billion, or around $235 per share. 

Speaking with CNBC, Buffett said that the deal started to come together "about five or so weeks ago."  

Buffett's conglomerate has owned PCP for a while now and was out buying more shares in the first quarter of 2015 as shares continued to slide.  PCP has been hit due to declines in its oil and gas business exposure but the vast majority of its focus is in aerospace and that's undoubtedly what drew Berkshire to the name.

Buffett said that one of his portfolio managers, Todd Combs, spearheaded this as he bought shares for Berkshire.

Talking with CNBC, Buffett said that they'll likely do the majority of the deal with cash, and a little bit of debt.  Berkshire likes to keep around $20 billion in cash on hand, so this big buy means they probably won't do any other large deals for another year.


Other 'Winners' In The Deal?

Berkshire wasn't alone in purchasing PCP shares in Q1 either.  As we flagged in the May issue of our Hedge Fund Wisdom newsletter, PCP was a consensus new buy with the likes of Third Point, ValueAct Capital, Soroban Capital, and Farallon Capital initiating new positions.

One other very notable fund was out buying a lot of PCP as well: Lou Simpson's SQ Advisors.  Prior to founding SQ, Simpson worked at Berkshire Hathaway.  Of the above managers, he bet the biggest on PCP on a position size weighted basis, given that he allocated almost 10% of his portfolio to PCP shares.

Other big name institutions were out adding to their existing PCP stakes in Q1 as well, such as Ruane Cunniff (Sequoia Fund).

So while these funds may have 'won' in that they see their PCP shares appreciate a decent amount in a short period of time, some might lament the deal a little bit. 

Some managers were also buying in Q3 and Q4 of 2014 when prices were right around where Buffett is buying PCP out now, so their return isn't great.  Other managers might be sad to see PCP disappear from their portfolios as they saw a long-term opportunity for appreciation within the aerospace industry.  And lastly, all of the managers who just bought in Q1 will now see these gains hit by short-term capital gains tax.