Buffett’s ‘Sweet’ Deal

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With the number of creditors who are willing to sign on the dotted line after some of their best customers have been forced to write off massive amounts of debt just to stay afloat being pretty low, one wonders whether the April 28 buyout of William Wrigley Jr. Co. (WWY) by Mars Inc. and Warren Buffett’s Berkshire Hathaway (BRK) would be such big news in better market and economic conditions.

Anytime Warren Buffett steps into a deal, though, investors sit up straight and pay rapt attention. So, of course his involvement in engineering some creative financing to help M&M maker Mars acquire the world’s biggest chewing gum manufacturer (in a $23 billion deal) isn’t exactly going to go unnoticed on Wall Street. Because, let’s face it — if you want to follow in the footsteps of the cash-flush, “smart money” investors, Mr. Buffett is the one you want to emulate!

Wrigley shareholders, who saw their stock close at $62.45 on April 25 (on trading volume of just more than 1 million shares), saw the stock trade in the $77 range with volume well-above 28 million on April 28. Per the deal, WWY shareholders received $80 in cash for each share. Talk about a chewing-gum company that’s bursting with flavor for its investors!

‘SO EASY, A CAVEMAN CAN DO IT’

You may recognize that phrase from Geico commercials. What you may not know is that Geico is one of Berkshire Hathaway’s three subsidiaries, two of which focus on property and casualty insurance. (The other offers fine jewelry.)

Thus, in a field fraught with risk (i.e., investing), this is a man who knows how to reduce or even avoid big exposure to it. The man isn’t called the “Oracle of Omaha” for nothing!

According to Investopedia, Buffett invested $10,000 in 1965 into Berkshire Hathaway and it was worth $30 million, 30 years later. For the rest of us who are hoping to gain even a fraction of his Midas touch when it comes to picking the “right” names, we don’t need to sit on the sidelines because we don’t have his millions or billions to invest.

So, keep in mind that he isn’t investing out of the kindness of his heart — he’s not trying to “save” companies that are floundering. He’s picking strong names and using his influence (and capital) to make them stronger. He declares on Berkshire Hathaway’s Web site that “You probably know that I don’t make stock recommendations.” But he doesn’t have to — his investments speak for themselves.

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PROFIT LIKE BUFFETT

You don’t have to be an oracle in your own right to take advantage of investable opportunities. But how do you get in on the ground floor of opportunities before they shoot into the stratosphere?

When you hear about one of these sweet deals (like one candy company aligning itself with another) taking place, if you weren’t invested in these names in the first place, there’s always the question of whether you should get in on them, and at what price?

Some of the publicly traded holdings in Berkshire Hathaway’s portfolio include such American institutions as American Express (AXP), Procter & Gamble (PG) and Coca-Cola (KO), just to name a few. Basically, these aren’t companies that are going away anytime soon, and Mr. Buffett isn’t exactly the type of investor who will sit idly by.

Mega-investors like Buffett, Kirk Kerkorian (who just upped his stake in Ford (F) to 4.7% and counting) and others oftentimes do put money into troubled sectors that they can help along the road to recovery or simply to bigger profitability.

One thing these moguls share in common, other than their expansive financial resources, is their business sense that they fully intend to share with management. (Or, at the very least, they will let their opinions be known by the way they do or don’t vote at shareholder meetings!)

But even as major or even majority shareholders, they can’t always turn around a company single-handedly, quickly or even at all, in some cases. But for the most part, many investors assume that their involvement will lead to good things. And if nothing else, publicly traded companies that have a big name attached to them certainly aren’t lacking for attention by the investing community!

WHAT ARE YOUR OPTIONS?

Although Buffett buys companies he likes, you can simply buy their stocks or, even better, their options. He may not directly make stock recommendations, but his actions speak for themselves.

And if you admire his investment style — or, at least, the profits he’s pulling in, you can profit like Buffett without breaking the bank.

In the aftermath of the big takeover news, in which shares of WWY definitely got sweeter, option premiums skyrocketed as the formerly at-the-money calls at the June $60 strike closed at $3.90 on April 25 and hit a high of $18 on April 28.

(Just remember that the stock would have to be trading above $78 at expiration for those $18-per-share options at the $60 strike, for example, to be worth that kind of investment.)

But at a time when consumer spending figures are pretty abysmal, the government’s giving taxpayers with incomes below $75,000 funds meant to stimulate a lagging economy and corporate earnings are less “hit” than “miss,” stocks are cheaper than they’ve been in a decade. And buying options instead of stocks is not only cheaper, but smarter in any kind of market and particularly this one!


If you enjoyed this article, check out Dawn Pennington’s “Market-Makers Can Make or Break Options Trades” and “Generate Quick, Real Profits Synthetically.”


Article printed from InvestorPlace Media, https://investorplace.com/2008/04/buffetts-sweet-deal-wwy/.

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