Warren Buffett, best known as a savvy investor, has been involved in businesses ranging from insurance to candy. Now he can add banker to his résumé.
Berkshire Hathaway's CEO is becoming a modern-day J.D. Rockefeller by bankrolling deals with his company's $35.6 billion cash hoard.
Thursday's Berkshire-backed deal between Dow Chemical dow and Rohm and Haas roh shows Buffett is standing by ready to finance deals other lenders might not have the cash or guts to manage.
Berkshire's pile of cash is even more valuable in an environment in which banks and investment banks are trying to raise cash instead of put it to work. Banks, hedge funds and big investors are retrenching due to the credit crunch and weak stock market.
"Cash is king, and Berkshire is a leading holder of capital," says Richard Peterson of Standard & Poor's. "Perhaps Berkshire now is the new de facto credit market."
Dow Chemical's $15.3 billion buyout of Rohm and Haas, backed by $3 billion of Berkshire's cash, is the world's sixth-biggest deal this year and second-largest since 1995 in the chemical business, Dealogic says.
In many ways, the current environment is a perfect one for Buffett for several reasons:
•Private-equity players are absent. Firms using borrowed money to buy companies were bidding the price of companies up until last year. "Buffett would not compete," says Timothy Vick, portfolio manager at Sanibel Captiva Trust, which owns Berkshire shares.
But now, those leveraged-buyout firms are finding it more difficult to borrow money and are largely out of the game. The value of U.S. deals backed by private-equity firms this year has collapsed 87% to $43.8 billion from a year ago, says Dealogic. Most investment banks are trying to beef up balance sheets. "Berkshire is powerful because it has become a lender of last resort," Vick says, adding Buffett took a similar role after the junk bond collapse in the 1990s.
•Companies are buying rivals. So-called strategic merger activity, where a company buys a competitor, is up 1% to $646.6 billion this year, Dealogic says.
Some of the biggest deals this year are examples, including Verizon's vz $5.9 billion purchase of Alltel, NRG Energy's nrg $9.5 billion purchase of Calpine and the $21.9 billion acquisition of Wm. Wrigley Jr. by Mars. Such deals are logical for Buffett as a partner, as was the case with the Mars deal, since he prefers to leave the management team in place.
•Valuations are weak. With the S&P 500 index entering a bear market this week, stocks are much cheaper than they were a year ago, a detail that's important to Buffett, says Vahan Janjigian, author of Even Buffett Isn't Perfect. Shares of chemical companies are down because oil is one of their biggest raw materials and oil prices are soaring. Dow Chemical shares are 32% below their 52-week high. Prior to Thursday's 64% pop, Rohm and Haas stock was 28% below its 52-week high.
It doesn't get much better for Buffett than this, Vick says. This deal is "right out of his toolbox. It's classic Buffett," Vick says. "It's a perfect time and environment for Buffett."