How does Warren Buffett value an acquisition?

Warren Buffett just bid to take Heinz (HNZ) private for $72.50 per share.  Heinz’ shares jumped from $60 to $72.50.

Buffett is an acolyte of Benjamin Graham.  Graham set out seven criteria for how to value a stock based upon price, earnings, book value, current ratio, and growth.  His criteria are in the second column of this table.

Graham Heinz
Revenue $2B+ $11B OK
Current Ratio 2+ 1.2 ?
Earnings 10 years + Yes OK
Dividend 20 years + Yes OK
Growth 3%+ ~5% OK
P/E 15- 19 ?
P/B 1.5- 7 ?

So how does Heinz measure up?  Heinz’ measures are in the third column of the table, and Heinz falls short on three of Graham’s seven criteria: current ratio; P/E ratio; and P/B ratio.

The lesson must be that even Graham’s criteria are only broad guidelines for acquisition (or Buffett has made an error).

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