Chart of the day: Warren Buffett’s bolt-ons

By Felix Salmon
February 26, 2012
shareholder letter, I was struck by the number of times he talked about bolt-on acquisitions.

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Reading Warren Buffett’s latest shareholder letter, I was struck by the number of times he talked about bolt-on acquisitions — situations where one of his subsidiary companies makes an acquisition of its own. They’re mentioned six times in this letter, and then at the end he mentions a “tuck-in” acquisition, which is essentially the same thing.

I wondered if he’d ever been so keen to talk about such things in the past, so I called up the last ten years’ worth of shareholders’ letters. He’s never used both terms in the same letter before, and he’s never used the term “bolt-on” more than once.

This could of course simply be random variation, but I think that something important is going on here. The big question, with Berkshire Hathaway, is how it’s going to invest its billions of dollars, especially now that companies like Swiss Re, Goldman Sachs and General Electric are exercising their options to return billions of dollars of emergency funding from Berkshire.

In the past, Buffett has talked about spending enormous sums buying very large companies: last year, for instance, he said that Berkshire will need “major acquisitions” (his emphasis), adding that “our elephant gun has been reloaded, and my trigger finger is itchy.”

This year, there’s no talk of elephants. Instead, various bolt-ons are scattered throughout the letter, Princeton Insurance being the only one mentioned by name. The rest are relatively small and anonymous. But I see a message here: just because you don’t see Berkshire bagging elephants, that doesn’t mean it isn’t growing by acquisition. It probably is, but just at the level of subsidiary companies, buying other companies you probably haven’t heard of and which probably aren’t big enough to warrant Berkshire’s shareholders being told the details.

Essentially, Buffett is saying “trust us: we’re growing, even if you can’t really see it.” But what you can see is the change in his language. The only real difference between a bolt-on and a tuck-in is that a bolt-on sounds bigger and more important. And so after using the term “tuck-in” seven times between 2006 and 2008, he’s now largely abandoned it. And the bolt-ons are coming thick and fast.

John Hempton singles out one 2002 acquisition which Buffett made and which has been extremely successful — but the fact is that the company in question was bought for $139 million and is now worth maybe $1 billion, after throwing off $180 million in cash. That is indeed impressive, but it doesn’t move the needle for a company with a market capitalization of $200 billion. You need a lot of such acquisitions to do that, and they don’t scale: they’re hard to find, and don’t come along every month.

At the beginning of every annual letter, Buffett compares the performance of Berkshire Hathaway’s book value to the performance of the S&P 500. Here’s two ten-year periods: on the left is 1973-1982, and on the right is 2002-2011.


What you’re seeing here is something that Buffett makes no secret of: it’s much easier to grow very fast when you’re relatively small than it is when you’re huge. Check out that run of growth beginning in 1975, in the first column: it’s simply astonishing. And even the relatively modest performance in 1973 and 1974 looks fantastic when you compare it to what the rest of the market was doing.

Buffett’s kept his ability to stay conservative and outperform in down markets. His two best years of the past ten, if you look at the “relative results” column, were — by far — 2002 and 2008, when the broad stock market fell a lot, but Berkshire’s book value did much better. And that’s largely an apples-to-oranges test in any case: after all, the book value of the S&P 500 didn’t fall nearly as much as its market value either.

If you look at Buffett’s own favored metric, the per-share book value of Berkshire, he’s had some good years of late, but nothing which even comes close to the numbers he was posting in the 70s.

That’s to be expected: big, mature companies don’t grow as fast as the best small companies. But when you’re a public company, shareholders’ desire for growth never goes away. Especially when, as at Berkshire, the stock doesn’t pay any dividends. As a result, every year Buffett does two things in his letter to shareholders. Firstly, he tries to downplay expectations as to how fast Berkshire is going to be able to grow going forwards. And secondly, he tries as best he can to explain where the future growth they want is going to come from. He’s consistent on the first part. But on the second he moves around a bit more. And this year, the message is that he’s going to encourage his subsidiary companies to make lots of acquisitions.


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Buffett’s been at this a long time. He’s made a large number of acquisitions. I cannot believe there aren’t a few lemons or under-performers in his portfolio. When investors get knighted, they’re above being questioned. This isn’t to detract from some of his quality writing or his successful spotting of good opportunities, but it’s not always as it seems, and lately a great many of his investments could arguably be the result of his government connections more than pure investing acumen.

Posted by Sechel | Report as abusive

It’s difficult to draw conclusions from that yearly historical return comparison chart. Perhaps Berkshire Hathaway performed well during the 1970′s and some of the 1980′s because the U.S. economy in general was enjoying a lot of growth and expansion? Or not: We were transitioning from a manufacturing-based economy to services. It is complicated.

Also, it wasn’t clear (to me) what Buffet meant in the 2010 calendar year letter to shareholders, regarding his itchy trigger finger and the need to maintain a brisk pace of acquisitions. In the preceding sentence, he said that it was relevant to the non-insurance segments of Berkshire. Of the four “sub-groups”, insurance is by far the largest and strongest, according to Warren Buffet. But the wording in that paragraph wasn’t exactly cut-and-dried, about insurance and non-insurance, so Felix’s conjecture is just as likely as not.

Finally, I find it a little sad that Buffet has become so fond of “bolt-on” and “tuck-in” terminology. I don’t see a good reason for that, as it makes things more confusing. Warren Buffet of all people, is supposed to be a plain dealer, nice and straightforward. I complain about N. Taleb creating his own financial nomenclature, that it mostly serves the greater glory of N. Taleb rather than public understanding. But N. Taleb is describing new concepts e.g. anti-fragility. He’s an academician, they’re supposed to be creative. Even more relevant: Aunt Sara and her peers haven’t entrusted their life savings to Taleb, whereas they have done so with Berkshire Hathaway. So why does Buffet use these non-standard, sort of obfuscating terms?

Posted by EllieK | Report as abusive

In the 70s, there was a Value Line set of stock picks which, like Buffett, often included “cigar butt” type companies (buy when below-book value low, sell when they go back up; cigar butt from The Snowball, his bio). It was a LOT of work to look at hundreds of companies and keep the numbers straight, or take enough notes to do so.

Buffett was able, and very very willing, to read a ton of financial statements and keep it all in his head — a HUGE advantage over most others.

Today, far more folks are trying to copy that idea, with computer help, meaning far fewer “good buys” are in the market and remain available. The Market in the 70s was less efficient than it has become in the 00s (tho still not fully meeting the Efficient Market Theory).

Posted by TomGrey | Report as abusive

Hi Felix, here are my comments: -the-2011-berkshire-hathaway-annual-repo rt-part-3-on-acquisitions/

Really appreciated your article here, as I do with most of what you write.


Posted by DavidMerkel | Report as abusive

nicely done. Buffett did make some very good catch-ons with his goldman investment.

Posted by cnhedge | Report as abusive

TomGrey: I like that expression, “cigar butt” companies! It is so descriptive, and funny too. Warren Buffet is amazing in that he has been so successful, for so long, earning extraordinary returns without help from HFT or computationally-intensive style quantitative finance. I used to wonder if he were an alien (not the immigrant variety!) as he seems to defy everything I’ve learned and observed, by virtue of his consistency over a span of decades.

Another savvy discoverer of “cigar butt” and non-glamorous, small-cap value stocks is Mario Gabelli. One of his mutual funds in particular earns positive returns year in and year out. (No, I don’t believe that Warren Buffet AND Mario Gabelli are aliens, from the same planet!)

Posted by EllieK | Report as abusive

Sorry, one more thing I forgot to mention.

Felix: Thank you for this write-up. I appreciate the fact that you provided in-line links to each PDF you cited, the B-H annual shareholder updates. I would not have had the opportunity to access those otherwise. Well, not easily. (David’s comment made me remember to mind my manners better).

Posted by EllieK | Report as abusive