Wednesday, November 4, 2009

Berkshire + Burlington

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 @

Burlington Bet Could Derail Berkshire by Doug Kass @

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.


  1. Not my favorite deal either but I think his reasoning for the stock split (of the B shares only btw)is perfectly valid.

    "Well, yeah, I'm not big on stock splits. But by having this split, it enables anybody that has as little as one share of BNSF to opt for the tax-free exchange, the 40 percent per share. So those small shareholders can have exactly the same availability that otherwise would only have been available to a big shareholder. Our main exchange will be for 'A' shares. And since the 'A' sells for around $100,000, it means anybody that had less than that amount of BNSF would not have the same choice as a big shareholder did. So, we're not splitting the 'A' but we are splitting the 'B' 50-for-1."

    This quote is from his interview with CNBC. Link:

  2. Rich,

    Buffett doesn't care about the taxes owed by BNI shareholders. Buffett loves taxes! Especially estate taxes. Except he doesn't want to pay them which is why he's giving him money to private charities. He rightly assumes that Uncle Sam won't allocate as well.

    Buffett is not looking out for the little guy. If anything, he wants Berkshire in the S&P 500.

  3. Interesting comments from an analyst that works with Bill Miller at Legg Mason:

    "That being said, I like the deal. It's not a great price, but a decent price that creates an IRR on a big piece of capital that is far above the market-implied returns on reinvested earnings for Berkshire. The inflation hedge is also nice when Berkshire has $60B in long-duration liabilities that are negatively sensitive to inflation.

    Finally, it's a duopoly business with pricing power. We can talk all we want about the miles a ton of freight can travel on a gallon of diesel, but if that were the penultimate measure of something, Berkshire would own steamship companies. Fuel efficiency is nice, but it's not the big story. The company's unique competitive standing and its pricing power are."