Berkshire Hathaway Inc. (NYSE:BRK.A), billionaire Warren Buffett’s mega-conglomerate, announced its purchase of Precision Castparts Corp. (NYSE:PCP) on Monday for a reported $235.00 per share, or $37.2 billion. (Source: Buffett pays high price for Precision Castparts, last accessed August 10, 2015.)
Berkshire already holds a three percent stake in Precision Castparts, making it one of the company’s largest stakeholders. Part of the agreement requires Precision Castparts to restructure itself as a unit of Berkshire, but retaining its name and headquarters in Portland. The financial transaction itself is still contingent on shareholder and regulatory approval but is expected to conclude by spring 2016.
Precision Castparts manufactures high-end products for the aerospace industry, including aircraft blades, turbines, bolts, fasteners, and pipes and other equipment for the energy generation and oil and gas industries.
The deal, Buffett’s largest to date, is the legendary investing guru betting on a boom period in the aerospace industry. Airline companies are undergoing a period of consolidation and restructuring, and there has been a massive surge of thousands of new aircraft ordered. (Source: Reuters, last accessed August 10, 2015.)
Berkshire’s profile will continue to evolve. The company once generated revenue primarily through its insurance business, but now includes a robust portfolio of utilities, railroad and industrial manufacturers, home builders, and food distributors among others.
The deal will certainly come as a boost to Precision Castparts, which has been hit hard by production issues, destocking by one of its biggest customers, and exposure of a portion of its manufacturing to the downturn in the energy sector.
The deal is well in line with Buffett’s easy-to-understand investing fundamentals. Precision Castparts uses complicated proprietary technology to produce parts for of the largest global aerospace companies. The very nature of the business represents a major obstacle to new competitors, which protects the company from potential rivals.
Buffett has never been one to have a short-term outlook on his investment strategies, and certainly not on his largest moves. Precision Castparts’ underperformance this year is largely due to a slump in the oil and gas sector, but this won’t last. Given the coming demand for aerospace components, the inevitable rise in the global energy sector, and his sound financial stewardship, Buffett purchased the company at a bargain and will be reaping the benefits in due time.