Google creates a new holding company, while Berkshire Hathaway buys Precision Castparts Corp

Equity markets started the new week with a resilient session on Monday, as all major European indexes posted gains above 0.75%, while the FTSE 100 closed flat on the day. In the US, stocks rebounded after the negative performance of last week, with some major names posting sizable daily gains such as Apple Inc., advancing 3.64%, AT&T Inc. adding 1.61%, and Walt Disney Co. closing 1.51% higher.

Warner Buffett’s investment company Berkshire Hathaway Inc. was once again in the spot light as the Omaha-based giant announced another mega acquisition, after agreeing to buy the metal and aviation components maker Precision Castparts Corp. in a deal valued at $37.52 billion. Buffett’s firm is expected to pay $235 a share in an all-cash transaction that offers Precision’s shareholder a 21% premium over last Friday closing price. Precision Castparts, which mainly supplies the aerospace industry and competes with the kinds of Boeing Co., Airbus Group SE and, to some extent, General Electric Co., closed last week with a market capitalization of about $26.70 billion and the expectation to generate about $10 billion in sales this year, while maintaining an operating margin of 27%. The deal is said to be two third financed by cash in hands, and a third through cash borrowed from banks and the debt markets, and will help Berkshire putting some of its excess cash to use.

This acquisition, which comes just a month after the finalization of the merger between Kraft and Heinz, which Berkshire acquired last year in combination with private equity firm 3G, along with the already owned BNSF, is deemed to shift the profile of the Omaha-based conglomerate toward the heavy industries sector. Moreover, the latest deal also represents another major step in Buffett’s attempt to reshape the firm into a diversified conglomerate, shying away from the insurance and stock picking core business that has characterized Berkshire over the past 50 years.

Berkshire’s shares closed flat yesterday, after appreciating more than 9.5% over the past 12 month. In contrast, shares in Precision Castparts jumped 19.10%, to $230.92, recovering almost all loses recorded over the last four quarters.

Investors were also surprised by the announcement that Google Inc. will undertake a major corporate structure change, creating a holding company that will oversee the various business lines of the firm, which in turn will become independent subsidiaries. The intention of the Co-Founder and current CEO Larry Page is to streamline the tech giant’s corporate structure, giving the different units more focus, independence and financing transparency, addressing some of the issues raised by regulators and investors alike. Larry Page is expected to maintain his role as CEO of the newly formed holding company, while Co-Founder Sergey Brin will be appointed Chairman of Alphabet, and Sundar Pichie, currently Google Inc’s deputy-CEO, will be appointed CEO of the Google division, which remains the subsidiary generating the bulk of revenues for the group.

Google shares, which closed slightly down on Monday, jumped almost 6% in after-hour trading, bringing the share price to $702.79, and adding to the positive momentum surrounding the tech stock.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.