Warren Buffett Lubrizol Investment. Why Warren Buffett acquired Lubrizol (NYSE: LZ) for 9 billion. Lubrizol is a company with great pricing power. It controls 35 percent of sales in an industry with only four major players, and has made significant improvements in its operating margins over the past few years. It also demonstrated pricing power in its ability to consistently raise prices. Buffett paid only about 5.8x EBITDA for this great company.
Buffett acquired Lubrizol for $9 billion in 2011, representing more than a 20% premium to its stock price prior to acquisition. Lubrizol is the world’s largest maker of lubricant additives. It holds 1,600 patents and sells 12,000 products in more than 100 countries.
Warren Buffett Investment in Lubrizol
He was initially skeptical about Lubrizol as it struck him as a business he did not know anything about. However, upon further research, he realized that this was a company with a durable competitive advantage, meeting a need that will likely become more important in the future. Oil additives would become increasingly important as fuel economy standards increase and consumers increasingly value fuel efficiency. This bodes well for companies such as Lubrizol, as the additives it makes that help cars burn cleaner will continue to be in high demand.
Buffett liked Lubrizol in particular because it was a low-cost player with extremely high profitability – over the past ten years, it has generated consistently high return on assets, return on shareholders’ equity and return on invested capital. It has also grown sales at 10% or more each year for the past 10 years. These indicate that Lubrizol is well-positioned to be a dominant market player in the lubricant additive market.