After deftly capitalizing on the financial crisis with a series of bold deals, Mr. Buffett on Tuesday agreed to buy the 131-year-old Burlington Northern Santa Fe Corporation.
A railroad might strike many people as a bit old-fashioned — more 19th century than 21st. But Mr. Buffett is wagering that as the economy revives, so will the demand for goods to be shipped by train. Burlington Northern carries coal and timber from the West, grain from the Midwest and imports arriving directly from Mexico and Canada, as well as through California ports.
And railroads, Mr. Buffett contends, are transportation for a fossil fuel-challenged future, since trains are generally more efficient and greener than trucks.
But for Mr. Buffett, the deal is also the fulfillment of a dream denied in childhood.
“This is all happening because my father didn’t buy me a train set as a kid,” Mr. Buffett joked in an interview.
His new toy will not come cheap. Berkshire Hathaway, the conglomerate he runs, will spend roughly $26 billion for the 77.4 percent of the railroad that it does not already own, paying $100 a share in cash and stock. As part of the bid, Mr. Buffett is splitting Berkshire’s class B shares 50-for-1 to pay Burlington Northern shareholders, breaking his rule of never splitting Berkshire’s stock. The split increases the total number of class B shares while avoiding fractional stock ownership for Burlington Northern shareholders.
“I stretched on this one," he said in an interview. “I went to the last nickel.”
Burlington Northern investors responded wildly to the news, pushing the company’s stock price up nearly 28 percent to $97 a share. While other transportation stocks also gained, the deal did not light a fire under the broader stock market. The Dow Jones industrial average fell 17.53 to 9,771.91.
Buying Burlington Northern is of a piece with the investments Mr. Buffett has made over the past year. He has positioned himself to profit from the mayhem in the markets and secure a legacy as one of the greatest investors of all time. While others were running scared last fall, Mr. Buffett invested billions in Goldman Sachs — and reached a far richer deal than Washington. He staked billions more in other blue-chip companies like General Electric and Wrigley.
The acquisition of Burlington Northern, based in Fort Worth, most likely concludes the investor’s search for an “elephant” acquisition, which he first described in one of his famed letters to Berkshire investors two years ago. His last major deal was in late 2007, when he agreed to buy a majority stake in Marmon Holdings, the conglomerate controlled by the Pritzker family.
“From my standpoint, it’s a lot easier to make a $32 billion investment than 10 $3 billion investments,” he said.
Even as the credit markets have improved and banks have become less skittish about lending, few companies can muster Mr. Buffett’s financial firepower. Berkshire will borrow $8 billion to supplement $8 billion in cash from its books, paying off the debt in three annual installments.
Investors big and small hang on Mr. Buffett’s pronouncements, and with good reason: if you had invested $1,000 in the stock of Berkshire in 1965, you would have amassed millions of dollars by 2007. He bases his philosophy on stable, reliable investments. “We’ll make a good return, not a great return,” he said of the Burlington Northern deal.
Mr. Buffett heeded his own rules of investing in making his latest acquisition.
One is to invest in companies that you understand. For Mr. Buffett, Burlington Northern fits the bill. He first bought a stake in the company in 2006, adding to shares held in two other railroad operators, Union Pacific and Norfolk Southern. Burlington Northern emerged as his choice, and he eventually built up a stake of 76 million shares in the company.
Another of his rules is to buy quality products at bargain prices. Burlington Northern’s stock price has stayed nearly flat over the past year, as its cargo load fell alongside the economy as a whole.
A third maxim is to move quickly — and Mr. Buffett did. On Oct. 22, Mr. Buffett arrived in Fort Worth as part of a visit to Berkshire’s portfolio companies. There, he met with Matthew K. Rose, the chairman and chief executive of Burlington Northern, who practiced an investor presentation with him.
Before he left, Mr. Buffett turned to Mr. Rose and said, “If you ever want a good home for Burlington, think of Berkshire.” Later, he spoke with Charles T. Munger, his trusted lieutenant at Berkshire, and began discussing a price for Burlington Northern.
The next night, Mr. Rose dropped by Mr. Buffett’s hotel, and within 15 minutes, the billionaire had delivered his bid. “There wasn’t much to say,” Mr. Buffett recalled on Tuesday.
By Sunday, Burlington Northern had retained advisers at Goldman Sachs and the boutique investment bank Evercore Partners, and the two sides began negotiating. Few issues emerged, other than Burlington Northern’s desire for a stock component to the bid, to allow its shareholders to choose a tax-free alternative to cash. By Thursday, lawyers from Munger, Tolles & Olson for Berkshire and from Cravath, Swaine & Moore for Burlington Northern began drafting deal documents.
Mr. Buffett said his goal was to have the deal sealed by Sunday at noon, when he was scheduled to have a root canal.
“I wanted to go into that with a mind that was at ease,” he said.
http://www.nytimes.com/2009/11/04/business/04deal.html?partner=rss&emc=rss
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