Berkshire Hathaway's new CEO Greg Abel started the week by inking a deal to acquire homebuilder Taylor Morrison for $6.8 billion, and followed that up on Monday with a $10 billion stock investment in Google's parent company, Alphabet.
Consolidation Strategy
Abel hinted that he may depart from Warren Buffett's longtime hands-off operating model by consolidating Taylor Morrison with Berkshire's existing site-built homebuilding operations that are part of its Clayton Homes subsidiary. For six decades under Buffett, Berkshire promised to largely leave companies alone after it acquired them.
"Over time, we expect to unify our site-built homebuilding operations into a combined platform," Abel said in a statement about his first big acquisition on Sunday, "enabling us to deliver the dream of homeownership to more Americans."
In addition to Clayton, which specializes in manufactured homes but also has a site-built unit, Berkshire owns several other housing-related businesses including Benjamin Moore paint and Shaw Floors.
Alphabet Investment
Berkshire's new investment in Alphabet will expand the stake that Buffett's company started to build last fall. By the end of March, Berkshire's Alphabet investment had tripled to include nearly 58 million Alphabet shares worth almost $17 billion. Alphabet said Monday that Berkshire has agreed to buy $5 billion of Class A common stock and another $5 billion of Class C stock as part of a broader plan to raise $80 billion to pay for computing infrastructure needed to power its AI offerings.
Active Management Approach
It's not clear how much consolidating Abel might do among the dozens of companies Berkshire owns. Those holdings include an assortment of insurers like Geico, major manufacturers such as Precision Castparts, and a slew of retail and service companies like NetJets, Dairy Queen, and Helzberg Diamonds. But Abel is known as a much more active manager than Buffett ever was.
"Given Greg's strength as an operator it will be interesting to see if he does consolidate these units to get some greater scale and efficiencies," said CFRA Research analyst Cathy Seifert.
Abel has been overseeing all of Berkshire's non-insurance businesses since 2018, and he hasn't made any major changes in operations though he has encouraged the company's subsidiaries to cooperate more when it makes sense. Abel became CEO in January, but Buffett remains chairman and Berkshire's largest shareholder.
"Under Greg, where it makes sense for efficiencies or scale, we'll likely see more consolidation than we saw under Buffett when Berkshire was smaller and the acquired company's founders were still in place," said investor Steven Check, president of Check Capital Management.
Deal Making and Cash Reserves
Berkshire shareholders will likely be excited just to see Abel making deals, given that the Omaha-based company is currently sitting on nearly $400 billion in cash. This deal by itself isn't likely to make a meaningful impact on Berkshire's bottom line because the conglomerate is so big, but dealmaking and investing are the areas of Abel's resume that investors had the most questions about.
Buffett praised Abel in an interview with CNBC on Monday morning: "Greg did that faster than I could have done it, smoother than I could have done it, and I never talked to the CEO. He has launched."
Abel has led acquisitions before while leading Berkshire's massive utility division, but obviously Buffett would have signed off on those. Now Abel is making the decisions with advice from Buffett and the rest of the board.
"I think investors will cheer Greg's foray into M&A as CEO. The purchase price seems rich given the current interest rate/macro environment," Seifert said.
Taylor Morrison Deal Details
Berkshire agreed to pay Taylor Morrison investors $72.50 per share in the all-cash deal. That represents a 24% premium over the company's previous closing price of $58.50. Shares of the Scottsdale, Arizona-based homebuilder jumped up near that purchase price on Monday while Berkshire's shares slipped 1%.
But Raymond James analyst Buck Horne said in a research note that it's possible Berkshire could face some competition from private equity firms or other potential buyers who might be willing to pay more for Taylor Morrison before its shareholders can vote on whether to accept this offer. "We would not be shocked if other players and/or private equity began to sharpen their pencils before the ink on this agreement is fully dry," Horne said.
