I've gotten tons of calls and emails since the Berkshire/Burlington deal was announced. I'm flattered that so many people care about my thoughts (or are just kind enough to humor me). Having followed Buffett since before he was widely known and cool, I know what a Buffett acquisition looks like. Burlington is out of character.
Whether it's motivation, price, method of payment, etc, Burlington is unlike any Berkshire deal I am aware of. While most people focus on the massive size of the deal, it is the least surprising aspect of the transaction. After all, Warren Buffett has often talked about hunting for elephants.
Many articles have already been written about this merger and I don't want to belabor it. Suffice it to say that some people have worshiped at the Oracle's altar for so long that they have lost all objectivity. I saw one article today saying that Warren's childhood love of trains led (in part) to this deal!
Lionel train sets are (slightly) cheaper?!?! And isn't Buffett the unemotional Sage of Omaha? Where is the cold calculating bridge player?
Sadly, there is a grain of truth in the train love story. Buffett usually gets 10 to 15 percent cash on cash returns on Day 1, so clearly something else is at work here. Why pay 20+ times earnings?
There are elements of hypocrisy and expediency (as evidenced by the stock split), empire-building, and a full dose of ego in this Burlington deal.
Here are 3 articles that encapsulate my thinking:
Buffett's Pricey Rail Trip - Berkshire uses its cheap stock to buy fully priced Burlington by Andrew Bary in Barron's
Buffett Revisits Hunting Ground for Survivors by Alice Schroeder @ Bloomberg.com
Burlington Bet Could Derail Berkshire by Doug Kass @ TheStreet.com
All three make excellent points and do it more eloquently than I can manage. The Doug Kass article is my favorite. He addresses Buffett's departure from the norm on price, the issuance of Berkshire shares, the stock split, and the increasing risk due to lower cash levels.
Bary addresses the fact that Buffett is selling Berkshire equity at cheap prices and paying up for Burlington. Schroeder knows Buffett well and has some interesting insights into the possible motivations.
Hint: it's more about legacy than value.
Buffett is famous for avoiding these kinds of quasi-auction transactions. They destroy value for the acquirer.
Buffett is the guy who underpays... or he used to. I remember minority Dairy Queen shareholders suing Buffett over the price he paid for their company in 1998. He stole it, but they lost the lawsuit anyway. Berkshire shareholders have been rewarded ever since.
Burlington shareholders won't be suing Buffett this time. And the Capitalist Woodstock is certain to be even more crowded.
I won't be there. For the first time in years, I don't own Berkshire shares. The Burlington deal is assuaging my guilt.
Disclosure: The author does NOT own shares in any of the companies mentioned.