What Warren Buffett might buy

By Pallavi Gogoi

updated 6:37 p.m. ET May 8, 2007

Warren Buffett, the world's most astute investor, is sitting on piles of cash. Now, from his company's annual meeting in Omaha, he says that he's willing to put down $40 billion to make an acquisition and that he could spend as much as $60 billion. The target could be added to the eclectic mix of companies that he has bought over the years at Berkshire Hathaway, including underwear maker Fruit of the Loom and auto insurer Geico.

Trouble is, Buffett has been struggling for years to find ways to spend his cash on companies that fit his investing ethos. Buffett is famously frugal in his personal life and in his corporate purchases. With competition from private equity firms and other aggressive buyers, it's tough to get companies for bargain prices these days.

If Buffett is intent on finding a mega-deal, what kind of target is most likely? For starters, the sage favors high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. He shies away from businesses he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that he doesn't have to go in and replace. And he's not chasing after a quick buck. Once he buys a company, he wants to hold on for the long haul, unlike most private equity firms.

Buffett has long invested almost all his money in the U.S., but he's now searching more actively on foreign shores. Last year he paid $4 billion to buy control of Israel's Iscar Metalworking, a cutting tools company that was founded in 1952 by a German-born immigrant Eitan Wertheimer. Now, there's speculation that he might buy a handful of large, well-run international companies. "Buffett is really open to looking outside the U.S., and the Iscar deal is getting the word out," says Mohnish Pabrai, managing partner at Pabrai Investment Funds, which manages $500 million in assets.

Buffett, of course, could ultimately decide that no mega-deal fits the bill. He could buy a number of small companies, instead of going for one major, multibillion-dollar shot. But if he does make a play for a large company with a market value of more than $20 billion, here are a few that could work in his portfolio.

Caterpillar
Surprised? Well, this old manufacturing mainstay fits the Buffett criteria pretty well. It's got a solid, steadily growing business and strong management. It's also been quietly building its global business, such that 50% of its sales now come from overseas. While it's a solid player in the U.S., the growing markets in Asia will pick up any slowdown in housing here. It recently opened a new parts distribution center in Shanghai and plans to build a new manufacturing facility in the Suzhou Industrial Park in China later this year. "There's a lot of development going on in China and India in terms of infrastructure building of roads and bridges, and that's a good trend to be riding long term," says Peter Cohan, president of Peter S. Cohan & Associates, a management consulting and venture capital firm.

Caterpillar's market capitalization is $47 billion with annual revenues of $42 billion. It has a nice $6 billion cash flow. What Buffett might not like is the $27 billion debt load. James Owens, CEO since 2004, has been at the company 35 years and would like to increase the company's revenue to $50 billion by 2010. A Buffett deal would let Berkshire gain exposure globally, and his deep pockets could help pay for Owens' dreams.

Ikea
If there's anyone who understands the cult of business, it's Buffett. More than 27,000 people made the trek to Omaha for Berkshire's annual meeting. There's a similar kind of fanaticism surrounding Ikea and company founder Ingvar Kamprad. Consumers around the world rave about the company's sleek designs and affordable prices.

Plus, Buffett knows and likes the furniture business. His most famous furniture holding is Nebraska Furniture Mart, the family-owned furniture store started in 1937 by Rose Blumkin, who continued working at the store until she was 103 years old. Buffett also owns R.C. Wiley Home Furnishings, Jordan's Furniture, and Star Furniture. Buffett will like the idea of value that Ikea's cheap furniture with high design offers. Ikea also has a brand name that is starting to become as ubiquitous as Coca-Cola, a Buffett staple. Ikea's revenues total about $18 billion from 226 stores around the world and the company has bigger ambitions globally.

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