It has been about two days since my favorite investor, Mr. Warren Buffett struck another acquisition super deal. This time he has made about 10% dent into the US$47 billion pile of cash his company Berkshire Hathaway has had on its hands by spending about US$4.5 billion for 60% stake in privately owned conglomerate Marmon Holdings Inc. (web: www.marmon.com)

It has also been reported, that this Buffett’s biggest ever investment outside of the insurance industry provides for Berkshire to acquire the rest of Marmon Holdings Inc. in progressive stages by 2014. So let’s just have a look at it a little closer.

Businesses of Marmon Holdings
Once again this company seems to fall neatly into traditional Buffett’s investing pattern easily complying with his rules for selection such as:

a) long tradition:
Marmon Holdings dates back to 1953 when its current owners, the Pritzker family, purchased an ailing manufacturer Colson Corporation.

b) continuous steady growth:
From its humble beginnings, Marmon evolved to multi billion organization which now operates over 125 independent business units in sectors such as Transportation Equipment Services, Construction & Industrial Components, Electrical Components and Retail Services (ie “boring” business segments just to Warren Buffett’s liking).

In 2006 Marmon Holdings employed in excess of 21,000 people in all parts of the globe and generated revenue in the vicinity of US$7 billion.

c) quality management:
Over the years of continuous business success the company still managed to stay privately owned by its founding Pritzker family. As its often the case in family businesses, they seem to have run pretty “tight ship” never allowing the costs of operation or company debts mushroom to levels which would severely the growth in Marmon’s bottom line.

d) good purchase price:
Valuing a company is always a tricky exercise even more so if the business is in private hands without much of the for public disclosure. As reported on their website, Marmon’s 2006 revenue reached US$ 6.98 billion (23.8% increase on 2005) and before tax income figure for the same year stands at about US$ 1.01 billion (pretty much in line with 2005).

The complete 3 years figures reported by Marmon’s are as follows:

So back of the envelope calculations seem to suggest that if Marmon’s keeps running its course for years to come (and the “boring” businesses seems to be able to do so for decades), Warren Buffett’s initial investment of US$4.5 billion should yield him about 60% of US$1 billion ie. US$600 million before tax.

That figure would suggest initial Return on Investment in the vicinity of 13.3% with a big potential for increase as Marmon’s keeps on growing its revenue and Berkshire keeps on purchasing the remaining portion of the company over the years.

Art of the deal Buffett style
Once again, Mr. Buffett has not disappoint the wide investing public with an ease and quickness he seemingly came up with this investment decision to allocate US$4.5 billion.

As reported, Buffett was first contacted about the potential transaction in the second week of December at a San Francisco election rally, following morning provided with a “phone book” sized document describing the The Marmon Group, read it on the plane back to Omaha and upon landing made the “we have a deal” phone call back to the Marmon’s banker.

And so it seems that Warren Buffett takes for his US$4-something billion purchases similar amount of time the regular folks spend on purchasing a fridge or washing machine.

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founded: 1852, NYSE code: BUD, homepage: www.anheuser-busch.com

Overview
Anheuser-Busch is the leading manufacturer of products for beer loving part of American alcohol consumer market. It either wholly owns, has a significant interest or exclusive importing rights for such beer brands as Budweiser, Bud Light and Corona together with European bestsellers such as Stella Artois, Beck’s, Bass Pale Ale, Grolsch and Asian top performers such as Tiger Beer or Harbin Lager.

In 2006 the brands of Anheuser-Busch stable seized about 49% of the overall American beer market shipping about 102 million barrels ie. more than twice the amount of its closest US competition. Anheuser-Busch is also a major player in the field of international beer markets – in 2006 international subsidiaries represented about 32% of the company’s total net income.

Analysis of December 2006 financial results:

• Market Cap: Depending on the daily prices of the company’s stock the total market capitalization is around US$42 billion over 777 million of issued shares
• Shareholders Equity: US$3.9 billion making the stock’s book value approx. US$5.10 per share (7.81% growth on FY 2005)
• Earnings per share: US$2.53 making the average EPS growth in last 5 years about 6.6%
• Return on Equity: 50%, averaging around 61.9%pa in last 5 years
• Balance Sheet: Negative working capital of US$-416.6 million (ie. US$ -0.54 per share) versus long term debt of US$7.7 billion

Sharemaket’s valuation:
Average BUD’s Price to Earnings ratio of 19.5 suggests the share price around US$49.3 (US$2.53 EPS x 19.5 P/E)

GROWTH STOCK:

• Conservative forecast of average EPS growth in next 10 years: 7%
• Share price in 10 years time: about US$97 (EPS in year 10 based on forecasted yearly EPS growth times average P/E)
• Total shareholders return in 10 years time: US$112 (share price of US$97 plus US$15 of the 10 years worth of dividends if the current payout ratio of about 40% persists)
• Rate of Return in next 10 years based on the mid December 2007 price of US$53.4 per share: 7.7%pa

Pros and cons:
+++ Traditional, very strongly positioned market leader of the alcoholic beverages industry
+++ Year after year showings of almost too good to be true ROE ratios
+++ Regular executions of stock buy back program is decreasing the number of outstanding shares and hence increasing the stock value
— Negative short term cash position as reported by the latest balance sheet

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founded: 1851, NYSE code: AXP, homepage: ir.americanexpress.com

Overview
American Express is arguably the most well known, iconic symbol of the payment industry. American Express Company operates one of the World’s widest payment processing networks and provides jobs to approximately 32,000 US and 33,000 non-US employees.

In 2006 the company derived about 60% of total net income from its U.S. card services operations, 22% from its international card commercial services and remaining 18% was contributed by its global merchant services.

Analysis of December 2006 financial results:

• Market Cap: Depending on the daily prices of the company’s stock the total market capitalization is around US$70 billion over 1.24 billion of issued shares
• Shareholders Equity: US$10.51 billion making the stock’s book value approx. US$8.50 per share (1.25% growth on FY2005)
• Earnings per share: US$2.99 making the average EPS growth in last 3 years about 9.4%
• Return on Equity: 35.3%, averaging about 26.2%pa in last 5 years
• Return on total Assets: 2.90%, averaging about 2.3%pa in last 5 years
• Balance Sheet: Total assets US$127.85 bln versus total liabilities of $117.34bln (TA/TL ratio of 1.09)

GROWTH STOCK:

• Conservative forecast of average EPS growth in next 10 years: 10%
• Share price in 10 years time: about US$140 (EPS in year 10 based on fore casted yearly EPS growth times average P/E)
• Total shareholders return in 10 years times: US$149 (share price of US$140 plus US$9 of the 10 years worth of dividends if the current payout ratio of about 18% persists)
• Rate of Return in next 10 years based on mid December 2007 price of US$51.75 per share: 11.2%

Pros and cons:
+++ Very well established business with great tradition and market leadership within its industry
+++ Excellent ROE and ROA ratios
— Rather small increases in book value over recent years
— Current credit market crisis and uncertainties about future consumer spending levels yet to reveal its full impact on the short term results

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