Mr Buffett may not like POSCO deal with Daewoo International - Report

Monday, 17 May 2010
The Street reported that Omaha may not be happy about the latest merger and acquisition reports out of Asia. South Korea's steel making giant POSCO, a major portfolio holding of Warren Buffett's Berkshire Hathaway, is closing in on a huge acquisition of Daewoo International for USD 3 billion.

The USD 3 billion price tag being offered by POSCO would not only be its largest acquisition, but would be well above the 30% premium that the market had indicated Daewoo, which operates in several raw materials markets, would fetch in an acquisition. The USD 3 billion price tag would be 40% above Daewoo's current value.

Warren Buffett, and other institutional shareholders of POSCO, has voiced concerns over the Daewoo deal to POSCO management in previous months when bids were first being submitted. Warren Buffett reportedly told POSCO management that he would not support POSCO as its initial bid was framed.

Berkshire Hathaway owns 4.5% of POSCO. The Korean steelmaker was among the top ten holdings among public stocks in the Berkshire Hathaway portfolio at the end of 2009.

Analysts in Asia have struggled to find a compelling reason for POSCO to pay such a hefty sum for a business that does not have immediate synergies with its position as the fourth largest steel maker in the world. POSCO currently relies on the import of raw materials like iron ore and coal, and among Daewoo assets are coal projects in Australia.

In the Korean media, it was reported that South Korea's Public Fund Oversight Committee had said POSCO won the bidding, and that POSCO was planning to bring in a former finance chief to head Daewoo, which will close by September.

POSCO shares have slipped this year, partially over fears that the steelmaker would overpay for Daewoo. One aspect of POSCO's plans might make Warren Buffett happy. POSCO is planning to fund the deal entirely from cash and cash equivalents.

In 2009, Berkshire Hathaway holding Kraft heard some angry words from Omaha when it planned to use its shares as a currency in its acquisition of Cadbury. While Buffett has not spoken publicly about the POSCO acquisition, Buffett voiced strong words of dissent in regards to the plan of Kraft management to acquire Cadbury. Kraft, of course, went ahead with the deal, though it pulled back from initial plans to use Kraft shares as a primary currency in the deal.

Asia has been in the thoughts of Warren Buffett recently, as he said at the company's recent annual meeting that he and other Berkshire Hathaway officials will soon be making their first trip to Japan. Overpaying for acquisitions is always on the mind of Warren Buffett, and we will see if any displeasure with POSCO's acquisition plans is reflected in the soon to be released quarterly portfolio holdings update of Berkshire Hathaway.