Renowned investor Warren Buffett is making his largest acquisition ever when his company Berkshire Hathaway agreed to buy US-listed Precision Castparts Corp. for $US37.2 billion ($50.2 billion) last night.
Australian investors might feel miles removed from the huge deal that will utilise a big chunk of Berkshire's massive $US66 billion cash pile, but there are a number of important read-throughs from the transaction that every ASX investor should know.
The most obvious way the acquisition is touching us is through the early 0.6% rally in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), as mega-acquisitions typically encourage risk taking and the euphoria could last for a few days yet.
But there are more significant and enduring implications from Berkshire's takeover of the leading US heavy equipment manufacturer for the aerospace and energy sectors.
The first is Berkshire's move away from its traditional insurance business and this shows where Buffett's priorities are heading. That could have implications for our insurance sector, which has been buoyed by news that Berkshire bought a $500 million stake in Insurance Australia Group Ltd (ASX: IAG) in June this year.
There's been speculation that Buffett could be looking to do more deals in the local sector with Suncorp Group Ltd (ASX: SUN) listed as another potential target.
While such deals remain well within the realms of possibility, Buffett's focus towards industrial companies could put acquisitions of Australian insurers on the backburner.
The other significant takeaway from the Precision Castparts transaction is Buffett's big bet on the US economy and on aviation as the target. The industry is one of America's largest exporters and counts airliner makers like Boeing and Airbus Group as customers.
This bodes well for the outlook of Qantas Airways Limited's (ASX: QAN) international operations with the Australian carrier tipped to post a $1 billion profit when it reports on August 20.
Shareholders in other ASX-listed companies with material exposure to the US economy can also take heart. This includes building materials company James Hardie Industries plc (ASX: JHX) and logistics group Brambles Limited (ASX: BXB).
Precision Castparts is by no means the first significant acquisition in manufacturing. Berkshire bought chemical maker Lubrizol in 2011 and Iscar Metalworking in 2006.
The last lesson from Buffett is the use of debt. Berkshire doesn't need to borrow to fund the deal given its cash holdings, but the company said it will borrow around $10 billion to help fund the deal.
This is a great time for under-geared companies to borrow to fund growth with interest rates at record lows.
I suspect Buffett agrees.
