Image: Warren Buffett
Nati Harnik  /  AP file
Warren Buffett thanks performers at the Fruit of the Loom booth, during the annual Berkshire Hathaway shareholders meeting in Omaha, Neb., earlier this month. The legendary investor is looking to add to his ecletic mix of companies under the Berkshire banner.
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updated 5/8/2007 6:37:24 PM ET 2007-05-08T22:37:24

Warren Buffett, the world's most astute investor, is sitting on piles of cash. Now, from his company's annual meeting in Omaha, he says that he's willing to put down $40 billion to make an acquisition and that he could spend as much as $60 billion. The target could be added to the eclectic mix of companies that he has bought over the years at Berkshire Hathaway, including underwear maker Fruit of the Loom and auto insurer Geico.

Trouble is, Buffett has been struggling for years to find ways to spend his cash on companies that fit his investing ethos. Buffett is famously frugal in his personal life and in his corporate purchases. With competition from private equity firms and other aggressive buyers, it's tough to get companies for bargain prices these days.

If Buffett is intent on finding a mega-deal, what kind of target is most likely? For starters, the sage favors high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. He shies away from businesses he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that he doesn't have to go in and replace. And he's not chasing after a quick buck. Once he buys a company, he wants to hold on for the long haul, unlike most private equity firms.

Buffett has long invested almost all his money in the U.S., but he's now searching more actively on foreign shores. Last year he paid $4 billion to buy control of Israel's Iscar Metalworking, a cutting tools company that was founded in 1952 by a German-born immigrant Eitan Wertheimer. Now, there's speculation that he might buy a handful of large, well-run international companies. "Buffett is really open to looking outside the U.S., and the Iscar deal is getting the word out," says Mohnish Pabrai, managing partner at Pabrai Investment Funds, which manages $500 million in assets.

Buffett, of course, could ultimately decide that no mega-deal fits the bill. He could buy a number of small companies, instead of going for one major, multibillion-dollar shot. But if he does make a play for a large company with a market value of more than $20 billion, here are a few that could work in his portfolio.

Caterpillar
Surprised? Well, this old manufacturing mainstay fits the Buffett criteria pretty well. It's got a solid, steadily growing business and strong management. It's also been quietly building its global business, such that 50% of its sales now come from overseas. While it's a solid player in the U.S., the growing markets in Asia will pick up any slowdown in housing here. It recently opened a new parts distribution center in Shanghai and plans to build a new manufacturing facility in the Suzhou Industrial Park in China later this year. "There's a lot of development going on in China and India in terms of infrastructure building of roads and bridges, and that's a good trend to be riding long term," says Peter Cohan, president of Peter S. Cohan & Associates, a management consulting and venture capital firm.

Caterpillar's market capitalization is $47 billion with annual revenues of $42 billion. It has a nice $6 billion cash flow. What Buffett might not like is the $27 billion debt load. James Owens, CEO since 2004, has been at the company 35 years and would like to increase the company's revenue to $50 billion by 2010. A Buffett deal would let Berkshire gain exposure globally, and his deep pockets could help pay for Owens' dreams.

Ikea
If there's anyone who understands the cult of business, it's Buffett. More than 27,000 people made the trek to Omaha for Berkshire's annual meeting. There's a similar kind of fanaticism surrounding Ikea and company founder Ingvar Kamprad. Consumers around the world rave about the company's sleek designs and affordable prices.

Plus, Buffett knows and likes the furniture business. His most famous furniture holding is Nebraska Furniture Mart, the family-owned furniture store started in 1937 by Rose Blumkin, who continued working at the store until she was 103 years old. Buffett also owns R.C. Wiley Home Furnishings, Jordan's Furniture, and Star Furniture. Buffett will like the idea of value that Ikea's cheap furniture with high design offers. Ikea also has a brand name that is starting to become as ubiquitous as Coca-Cola, a Buffett staple. Ikea's revenues total about $18 billion from 226 stores around the world and the company has bigger ambitions globally.

Buffett owns MidAmerican Energy Holdings, an energy producer. He might want to expand his energy exposure by adding Valero, America's largest oil-refining company, which also has a no-layoff policy. There just aren't that many refineries around, and no one is building many new ones. That makes Valero a potentially lucrative asset. Also, there's so much demand for gasoline that U.S. refineries have to run at close to full capacity. "There's high demand for its refineries, which are clearly in short supply today," says Cohan.

Valero isn't cheap. Its shares trade at $72.48, near their 52-week high, and its market cap is $44 billion. But it's a well-run company. And with $90 billion in annual sales, its debt load of $5.3 billion is relatively small.

Lehman Brothers
The Oracle of Omaha is no fan of astronomical pay packages, the kind of thing handed out like candy on Wall Street. But he certainly understands the finance business. He had a long-term investment in Salomon Brothers, and even took over as interim chairman in 1991 for 10 months to help turn around the beleaguered investment bank.

He has stayed away from Wall Street since, but Lehman could be the kind of firm to lure him back. Richard Fuld is one of the longest serving chief executives on Wall Street, having taken over the job in 1993, and he's widely respected. He has built Lehman into a diverse financial powerhouse with steady earnings. The firm has branched out into private equity and investment management, acquiring money manager Neuberger in 2003. It's not cheap: Its stock has more than doubled in the last three years, pushing its market cap to $40 billion.

Lowe's
There's much speculation that rival Home Depot is a takeover target for private equity firms, and Buffett has bought Home Depot shares. But it's Lowe's that could draw acquisition interest. CEO Robert Niblock has polished the company's image with cleaner, brighter stores, which are known for providing good customer service, and it has been grabbing market share from Home Depot.

The company's stock is trading at the midpoint of its 52-week range, at $30. And if the housing slump continues, it could drop further. That could give Berkshire an opening. It already owns carpet retailer Shaw Industries and might be willing to shell out $46 billion to join Niblock's market-grabbing ride.

Buffett clearly would like to buy a large company that is tightly run, spews off a lot of cash, and has a great brand name. But those are few and far between, especially with the private equity firms sniffing around for deals. A lot of folks think that buying auto insurer Progressive would help Geico expand its market share, but with a $17 billion market cap, it is slightly smaller than what Buffett says he is looking for. Then again, Buffett could opt to buy several smaller companies that are under the radar, and surprise everybody. One thing is clear: Buffett is anxious to put his cash to use.

Copyright © 2012 Bloomberg L.P.All rights reserved.

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