The Warren Buffett led Berkshire Hathaway Inc. (NYSE:BRK.A) is near to complete a deal for buying Precision Castparts Corp.(NYSE:PCP). If this happens, it can be the biggest takeover ever by the conglomerate. When considering typical premiums, the industrial company's price tag could cross $30 billion. Its present market value is $26.7 billion.
Berkshire Hathaway is one of the biggest shareholders of Precision Castparts, with a stake of three percent on March 30. Precision was established in 1949, and the Portland, Oregon headquartered company manufactures a range of components like turbine blades and fasteners for aircraft companies. The list of clients includes Boeing Co. (NYSE:BA) and Airbus Group SE. It also manufactures equipment for oil and gas industries. Engine and aircraft manufacturers make up almost 50 percent of its yearly $10 billion sales.
This planned deal by Berkshire is a part of a long consolidation process being observed in the aerospace industry. This is because aircraft manufacturers have increased their output post securing orders of new jets, thereby prompting suppliers like Precision Castparts to invest in brand new equipment and also slash costs. This will permit them to achieve better production rates.
For its part, Precision Castparts has seen rapid expansion by a number of acquisitions. Its stock price, however, was depressed, due to the company's production problems, exposure to oil sector, and also de-stocking of one of its biggest customers.
Longer investment view
For Berkshire Hathaway, this deal is an example of the conglomerate turning its focus on acquisitions. This makes a change from its standard activities like insurance business and stock investing. It also displays the need for the company to do larger deals to continue its positive trend.
The shares of Precision Castparts have lagged the Standard & Poor 500 by almost 30 percentage points. The price of the company as multiple of the forward estimated earnings was traded at discount to the wider market since start of 2015.
In July, Precision Castparts did not meet estimates of Wall Street on fiscal quarter ending June. Profit dropped 17 percent. Mark Donegan, the Precision Chief Executive Officer, has announced that demand for products made by his company remained low among gas and oil industry clients. Precision has earlier targeted the oil sector as growth market. However, the recent dip in oil prices has negatively affected the company. The recent struggles of Precision Castparts have led a few investors to consider it an excellent acquisitions target.