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Warren Buffett's Berkshire Hathaway to Buy Insurer Alleghany for $11.6 Billion

Warren Buffett's holding company tapped into its massive cash pile to make its biggest acquisition in years.

Warren Buffett put some of Berkshire Hathaway's (BRK.B, $342.41) massive cash pile to work on Monday, striking a deal to acquire insurer Alleghany (Y, $676.75) for $11.6 billion.

The purchase adds to Berkshire's already sprawling core of insurance operations, which include Geico, General Re and National Indemnity Company. 

Berkshire will pay $848.02 a share in cash for Alleghany, or a 29% premium to its average stock price over the last 30 days. The property and casualty reinsurer and insurer will operate as an independent subsidiary after the deal closes, which is slated for the fourth quarter of 2022.

Shares in Alleghany jumped more than 26% at one point soon after Monday's opening bell. 

"Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years," Buffett said in a press release.

Berkshire's chairman and CEO has for years bemoaned the fact that rising asset prices have made it hard to find "whale-sized" acquisition targets at attractive valuations. With a market capitalization of around $774 billion and a 2022 revenue estimate of $295.9 billion, it takes a lot to move the needle on BRK.B stock or the company's bottom line. 

Rising asset prices have also changed Buffett's calculus when it comes to Berkshire's enormous stock portfolio. The holding company was a net seller of equities in all four quarters of 2021

The result is that Berkshire's cash hoard has nearly doubled over the past five years. The company ended 2021 with $146.7 billion in cash, cash equivalents and short-term investments. In 2016, that figure stood at $74.9 billion.

The Alleghany deal puts at least a slight dent in the company's cash pile, and pretty much qualifies as a needle-mover. At nearly $12 billion, it's Berkshire's biggest acquisition since 2016, when it purchased Precision Castparts for $37 billion, including debt. 

Kunal Sawhney, CEO of independent equity research firm Kalkine, says Alleghany makes a perfect strategic fit with Berkshire's extant insurance businesses. And, importantly, it comes at a time of rapid, industry-wide transformation in the post-COVID-19 era.

Consumers are increasingly turning to online search for insurance products, Sawhney notes. That's leading to higher conversion rates at a time when demand for products has been rising for two years and counting. 

"Insurance companies are adapting to changes, expanding their online channels to meet customer needs," Sawhney says. "Hathaway recognizes this. It knows that Alleghany's participation in the insurance businesses can provide the momentum it needs."

The Alleghany news comes hard on the heels of a different sort of milestone for Buffett. Berkshire Hathaway's Class A shares (BRK.A) passed the $500,000 mark for the first time in history on March 16. 

It's also worth noting that the Alleghany deal is hardly the first time Buffett has opened his wallet recently. Berkshire Hathaway has been guzzling up Occidental Petroleum (OXY) stock in March. At last count, BRK.B held 14.6% of the oil company's shares outstanding. The stake of 136.4 million shares is worth about $8.3 billion at current levels. 

OXY gives Berkshire Hathaway's stock portfolio increased exposure to the energy sector at a time of rapidly rising oil prices.

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