Warren Buffett's bid for Tech Data partly explains the GovCon market he almost (sort of) entered
By
Ross Wilkers
Warren Buffett largely went against his own investment approach in a bid to acquire Tech Data, now the new owners of DLT Solutions. That attempt also mirrors what is going on in the GovCon market that DLT plays in.
Global IT product distributor Tech Data on Monday closed its acquisition of DLT Solutions, the reseller of software and related services to U.S. public sector agencies.
That was expected. What transpired during Thanksgiving week was a welcome but unexpected development for Tech Data shareholders.
CNBC reported on Friday that the global investment firm run by Warren Buffett made a bid for Tech Data, which agreed in mid-November to be acquired by private equity firm Apollo Global Management but also has a “go-shop” period ending Dec. 9 to actively solicit other proposals.
Buffett’s Berkshire Hathaway offered nearly $5 billion excluding debt, or $140 per share, to top Apollo’s original price of almost $4.77 billion at $130 per share.
Apollo then raised its valuation of Tech Data and that offer was accepted at around $5.1 billion excluding debt, or $145 per share. The enterprise value including debt comes out to around $6 billion.
Buffett will not try again and hence will not be an owner of a U.S. government contractor, albeit by extension, in a disappointing development for this business journalist. But two trends highlighted by Buffett’s bid that seems contradictory to his own practices, which include largely staying away from tech companies and pickiness on prices, can also be seen in the GovCon market.
For one, investment groups including private equity firms are sitting on tons of cash waiting to be put to work. Financial data provider Preqin estimated approximately $1.2 trillion in so-called “dry powder” waiting in the wings as of last year’s end. Berkshire Hathaway has a $128 billion cash pile.
Many of the GovCon sector’s most active private equity investors have funds to work with as well. Veritas Capital closed a $6.5 billion fund in October, which was preceded by Arlington Capital Partners’ closure of a $1.7 billion fund in June. The Carlyle Group closed its newest fund last year at a record $18.5 billion, although GovCon is merely one of five industries that firm focuses on.
Cashed up private equity firms have evidently priced out the likes of Buffett in trend number two worth mentioning: the current environment of high multiples across several industries and stocks continuing to trade at or near all-time highs.
My own list of at least 30 public companies in the GovCon market to watch shows this group trading well in the upper half of their 52-week ranges for instance. That group helps at least paint a picture of how some privately-held contractors value themselves, which many public companies have noted recently shows lofty sellers’ expectations.
High valuations in the market has not slowed down private equity movement in GovCon, where much of the action has centered around building more formidable middle-tier businesses.
Perhaps these lines in the most recent edition of Buffett’s annual letter to Berkshire shareholders might be an allegory, where he indicates the firm may have to opt for partial stakes in companies rather than taking the whole.
“In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
“That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 -- I’m the young one -- that prospect is what causes my heart and Charlie’s to beat faster.”
The “Charlie” reference there is Berkshire Vice Chairman Charlie Munger, who have worked side-by-side at the holding company for 41 years.