Berkshire to Buy Lubrizol

By ERIK HOLM, SERENA NG And JAMES R. HAGERTY Barely two weeks after investor Warren Buffett said he was itching to make a big acquisition, his Berkshire Hathaway Inc. agreed to buy U.S. chemical maker Lubrizol Corp. for about 9 billion in cash. Berkshire said Monday it will pay 135 a share for Lubrizol and will assume about 700 million of the company's debt. The purchase price represents a 28% premium to Lubrizol's closing price of 105.44 Friday on the New York Stock Exchange and is 18% higher than Lubrizol's all-time closing high of 114.59, which it hit within the past six months. In mid-afternoon trading Monday on the Big Board, Lubrizol shares were up 28% at 134.15 The two companies began talks on a possible deal around the turn of the year, according to people familiar with the matter. Lubrizol wasn't looking to sell itself, but financial advisers made introductions, and the company's management came to view being part of Berkshire a good fit, these people said. Lubrizol, in a statement, called the deal with Berkshire a "transformative event," and said it would allow the company "to focus on long-term plans without the constraints of short-term public market requirements." The company, which was founded in 1928, makes chemicals used in engine oils and other lubricants used to make soap, hair-styling products, skin creams, paint and other industrial and consumer products. Lubrizol earned 732 million last year—up 46% from 2009—has operating profit margins of roughly 24% and a record of strong earnings—matching criteria Mr. Buffett has laid out for Berkshire acquisitions, according to a statement on Lubrizol's website. About 65% of Lubrizol's 2010 sales came from outside North America. The company employs about true religion jeans outlet 6,900 people, operates manufacturing plants in 17 countries, and has made a few acquisitions in the past few years. The deal is one of the largest in Berkshire's history, though dwarfed by the more than 26 billion the Omaha, Neb.-based conglomerate paid last year for railroad operator Burlington Northern Santa Fe. The acquisition would move Berkshire farther into the industrial sector, as opposed to the insurance industry, which has long been a major source of profit for it. Berkshire reported 13 billion in earnings for 2010 and held 38 billion in cash and cash equivalents at the end of the year, up sharply from 30.6 billion at the end of 2009, as its insurance businesses and securities investment portfolio continued to spit out cash. Mr. Buffett, the company's chairman and chief executive, has said he needs both large acquisitions and strong earnings from Berkshire's businesses to expand his company faster than the stock market, but the job is getting tougher as his conglomerate gets bigger. In his annual letter to shareholders last month, Mr. Buffett said Berkshire was ready for another major acquisition. "Our elephant gun has been reloaded, and my trigger finger is itchy," he wrote. Other Berkshire acquisitions in recent years include the 4 billion purchase of Iscar Ltd., an Israeli metalworking company, in 2006; the 4.8 billion purchase of the majority of Marmon Holdings, the Pritzker family's collection of manufacturing and service companies, in 2008; and smaller deals to buy Japanese toolmaker Tungaloy Corp., electronic-parts distributor TTI Inc. and power company PacifiCorp. Mr. Buffett's pronouncement last month touched cheap true religion jeans off a round of speculation over what companies would be a good fit for Berkshire. Mr. Buffett has professed a preference for cash-generating businesses with little debt and a substantial share of the market in their sectors, large competitive advantages over rivals, and solid management that he can leave in place. He has said that acquisition targets need to have pretax earnings of at least 75 million. After the deal closes, which is expected to happen in the third quarter, Lubrizol will operate as a subsidiary of Berkshire Hathaway. It will continue to be led by its current management team and remain based in Wickliffe, Ohio. Mr. Buffett, in a statement Monday, called Lubrizol "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." "Our only instruction to James—just keep doing for us what you have done so successfully for your shareholders," the statement said. Mr. Hambrick, 54 years old, is a chemical engineer by training and joined Lubrizol in the 1970s, starting in its operations department and later working in strategic planning and international business development, among other management roles. He became chief executive in 2004 and chairman in 2005. Paul Howard, director of Solstice Investment Research and a Berkshire Hathaway follower, said: "It looks like Buffett's paying top dollar, but it's probably a hedge against inflation—people will buy some of these products even if their costs go up." Before Monday's deal, Laurence Alexander, an analyst at Jefferies & Co. in New York, had calculated that Lubrizol would be worth about 143 per share to a private-equity buyer. Mr. Alexander said he doubted a rival bid would emerge but said that may depend partly on the size of the breakup fee, not yet disclosed. Jefferies forecasts earnings per share of 11.30 for this year at Lubrizol, up from 9.91 in 2010, excluding tax benefits. Citigroup true religion jeans outlet Inc. and Evercore Partners Inc. were financial advisers to Lubrizol on the deal, and Lubrizol's legal counsel is Jones Day. Berkshire's transaction counsel is Munger, Tolles & Olson LLP. Evercore has previously advised other companies Berkshire acquired or invested in, such as Burlington Northern and Swiss Reinsurance Co. —Gina Chon contributed to this article.