Warren Buffett's company said Monday it will spend about $9 billion cash to add specialty chemical maker Lubrizol Corp. to the eclectic mix of businesses inside Berkshire Hathaway Inc.
The purchase may help satisfy Buffett's appetite for large acquisitions to boost Berkshire's earnings power, but the deal is still significantly smaller than last year's $26.7 billion acquisition of the Burlington Northern Santa Fe railroad.
"Lubrizol is exactly the sort of company with which we love to partner _ the global leader in several market applications run by a talented CEO, James Hambrick," Buffett said in a statement.
Two years ago, Berkshire invested $3 billion in preferred shares of Dow Chemical to help finance Dow's $16.5 billion purchase of specialty chemical maker Rohm & Haas in 2009. That deal likely gave Buffett insight into the high-margin specialty chemical business.
In Monday's deal, Berkshire will pay $135 per share, a 28 percent premium to Lubrizol's closing stock price Friday of $105.44. The transaction also includes about $700 million in net debt.
Lubrizol, of Wickliffe, Ohio, makes chemicals for pharmaceutical companies, fuel additives for gasoline and diesel and other ingredients for the transportation sector. Last month, it reported that its fourth-quarter profit climbed 17 percent because of a $19 million tax benefit and higher sales. The company's revenue grew 11 percent to $1.32 billion.
Berkshire already owns a conglomerate of more than 125 manufacturing and service businesses called Marmon Holdings that may use some of Lubrizol's products. Marmon's businesses serve the transportation, energy and construction markets, and Marmon makes products ranging from railroad tank cars to metal fasteners.
Buffett biographer and Berkshire shareholder Andy Kilpatrick said he thinks Lubrizol will be a good fit because it appears to be a solid company.
"He's paying a reasonable premium, and he's getting an entire business with a brand name," said Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett."
Stifel Nicolaus analyst Meyer Shields said Lubrizol should complement Berkshire's other businesses, and the deal wasn't surprising after Buffett's comment in his shareholder letter about actively hunting for acquisitions.
But Shields said Berkshire shareholders may have been better off, especially in the near future, if Berkshire would simply return some of its cash to shareholders in the form of a dividend instead of acquiring Lubrizol.
"There's no real economic benefit being created by these sort of transactions as far as I can tell," said Shields, who maintains a "Hold" rating on Berkshire's stock. "If you really can't find anything to do with your cash, it's perfectly OK to not do anything with your cash. Give it back."
Berkshire finished 2010 with about $38 billion cash on hand, so it had the resources ready for a deal. Buffett has never issued a dividend at Berkshire because he believes he can generate a greater return for shareholders by reinvesting the money.
Morningstar analyst Greggory Warren said he doesn't think Lubrizol was on anyone's radar before Monday, but it seems to fit with Berkshire's recent acquisitions and should be a good use for some of the company's cash.
"It's just another decent-returning business that he was able to get at a reasonable price and slot it into the portfolio," Warren said.
Berkshire, which is based in Omaha, Neb., owns roughly 80 subsidiaries, including insurance, clothing, utility, furniture, jewelry and corporate jet firms. It also has major investments in such companies as Coca-Cola Co., Washington Post Co. and Wells Fargo & Co.
Buffett, whose investing decisions are carefully scrutinized by the world of finance, said earlier this month that while he's interested in making acquisitions, it's hard to find big businesses that fit into Berkshire well. He also noted that businesses that do appeal to him usually aren't selling at the right price.
Buffett is regarded as a master of value investing _ focusing on finding financially sound companies with underpriced shares. He has simple standards for what he looks for in an investment: easy-to-understand large companies with a strong competitive advantage that generate cash and above-average returns on capital.
Lubrizol says it is the top supplier of highly profitable lubricant additives in the world and a leading maker of ingredients for personal care products and pharmaceuticals.
Lubrizol said in documents filed with the Securities and Exchange Commission Monday that the reason the company appeals to Berkshire is a combination of its successful business, strong competitive position and consistent track record.
Hambrick, Lubrizol's CEO, said in a note to customers that few changes are expected as part of the deal because Berkshire plans to support the company's current long-term growth strategy.
Berkshire's biggest acquisition before BNSF was the $16 billion stock purchase of reinsurance giant General Re announced in 1998.
Berkshire Hathaway and Lubrizol expect the acquisition to close in the third quarter. After the deal is complete, Lubrizol will become a Berkshire Hathaway subsidiary. It will keep its Wickliffe, headquarters and continue to be led by current management.
Both companies' boards have unanimously approved the buyout, but it still needs the approval of Lubrizol shareholders.
Lubrizol shares gained $29.24, or 28 percent, to $134.68, while Berkshire Hathaway's Class B shares were down $1.09 to $84.21.