Salient to Investors:

Alice Schroeder writes:

By many accounts, Warren Buffett has pulled off another brilliant feat in spotting an opportunity in food stocks, yet he never made a significant investment when Heinz lagged the S&P 500 from December 2008 to January 2013, and since January 1997. Heinz’s stock was fairly priced before the deal and it was debt that hoisted the price to 20 percent over market.

Buffett got terms to warm Don Corleone’s heart – minimal equity in exchange for half of Heinz, a 9 percent dividend on $8 billion of redeemable preferred, and warrants.

Since January 2008, Berkshire has lagged the S&P 500, as it had for lengthy periods in the past, so why isn’t Berkshire facing pressure from shareholders?

Assuming the stock market’s future performance is more modest than in past decades, inevitable given that growth forecasts are being cut, then we should expect more merger and acquisitions. Companies are usually better off returning capital to shareholders than buying each other, but Wall Street dislikes businesses that shrink and often punishes companies that decapitalize. Slowing growth, margin pressure, and unstoppable competition from too-big-to-mess-with companies all point toward more consolidation for a while.

Giants like Berkshire, GE, Google,, and Wal-Mart have economies of scale, supply chain advantages, dominance in distribution, entrenched consumer brands, and political, economic, regulatory and business clout that allows them to effectively cripple their competition – too big to mess with. The US now has 3 airlines that are not only powerful, but indispensable.

Buffett has always liked monopolies. Each business that Berkshire buys dominates its market, and some are virtual monopolies. Berkshire could buy a Heinz-size company every year for decades without attracting complaints of being predatory. Succession? Berkshire resembles a slice of the economy so could operate essentially on autopilot for some time.

The US government is now so dependent on large businesses for anti-terrorism work, Internet security, national defense, and carrying out economic policy that it is hard to see how these interests could be disentangled even if anyone in Washington wanted to.

Despite stagnant wages and high unemployment, the steady widening of profit margins has continued thanks to deregulation, lax oversight of financial institutions, lower taxes, disempowered unions, shrunken worker benefits, tamer judicial activism, and a virtual freeze in social legislation. The first major reversal of this trend in many years – Obama’s health-care law in 2009 and new financial-service regulations – did not affect the market dominance of a small number of companies that are too big to fail or too big to mess with.

History shows the economy will not move in a winner-take-all direction for ever – viz. savage cultural reversal under Theodore Roosevelt. Americans have put up with crooked mortgage lenders, bailed-out banks, “pink slime” in beef, Facebook privacy policies, salmonella tomatoes, and cruise ships full of germs.

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