Buffett Bags His Elephant

"We are looking for big deals. The way I refer to it is that we are hunting the elephant. But we have got an elephant gun and it's loaded."
-- Warren Buffett, September 2002

Mission completed. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE:  BRK-B  ) shot and killed a massive, $44 billion elephant with this morning's acquisition of rail giant Burlington Northern (NYSE: BNI  ) .

And not really killed, of course, because Burlington Northern shareholders are getting $100 a share -- about 30% above where shares closed yesterday. Shareholders can opt for either cash or Berkshire stock.

Berkshire's buying the remaining $26 billion it doesn't already own, plus $10 billion in debt. That makes it the largest acquisition in its history, trouncing its former elephant, the $22 billion purchase of General Re back in 1998. It also makes Berkshire's big investments last fall in Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) look like peanuts.

Buffett's been loading up on railroads for years now. It really started in 2007 with big purchases of Burlington, Norfolk Southern (NYSE: NSC  ) , and Union Pacific (NYSE: UNP  ) . Who knows what he's thinking now, but the allure originally sounded something like this:

  • Rail freight's main competitors are trucks.
  • As the price of diesel soared and innovation took hold, rails gained a competitive advantage, mainly since railroads are markedly more efficient per gallon of fuel burned than trucks.

This advantage gets cemented in stone when you consider how darn tough it is to build a railroad. It's a unique position where their advantage over competitors (trucks) is growing, but the ability of new entrants to enter the industry is held down by massive capital needs. Berkshire co-Chairman Charlie Munger commented on this a few years ago, saying:

Railroads -- now that's an example of changing our minds. Warren and I have hated railroads our entire life. They're capital-intensive, heavily unionized, with some make-work rules, heavily regulated, and long competed with a comparative disadvantage vs. the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors.

We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time.

There's a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers in huge classes of business.

In other Berkshire news, class B shares will be split 50-to-1. This is big news in the Berkshire world because of Buffett's famous steadfast insistence on not doing so.

Why the change? It doesn't look like it has much to do with the Burlington deal. Since investors can opt for cash, the current $3,300 price of a B share wouldn't have excluded small Burlington investors. One might say Buffett's looking out for Burlington shareholders who don't want to take cash and have to book capital gains.

But, to be real, anyone with an investment worth less than $3,300 shouldn't be worried about oppressive capital gains. It may have to do with liquidity needs of Buffett's donations to the Bill and Melinda Gates Foundation. I'm truly stumped, though, and curious what other Fools have to say about the matter.

And that's where I'll turn it over to you. What do you think about this deal? Fire away in the comment section below.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway, which is a Motley Fool Stock Advisor and Motley Fool Inside Value pick. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.


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  • Report this Comment On November 03, 2009, at 2:09 PM, Crosshair wrote:

    I think this was a terrific deal! Take a look at my valuation I performed in June of this year. I priced Burlington around $95/share; but given the amount of time that has passed, it's reasonable to assume my value has grown closer to his price, $100:

    http://caps.fool.com/Pitch/BNI/3976862/all-aboard-burlington...

  • Report this Comment On November 03, 2009, at 2:12 PM, Savannahboy wrote:

    I am stumped on the 50-1 split, as well. Maybe someone with more time than me can look into the union contracts at Burlington and determine that the employees are granted stock into their pension plan or something goofy like that. If Berkshire must continue to contribute to some legacy pension then maybe each share needs to carry a smaller price tag. Who knows, though.

  • Report this Comment On November 03, 2009, at 2:14 PM, FoolishErik wrote:

    In the book, "The Essays of Warren Buffet", based on Berkshire's annual letters, Buffet said he created the Class-B shares to stave off single-stock mutual funds from becoming shareholders of Berkshire. He is extremely choosy about the type of investor he wants owning Berkshire stock, and he very much wants these kinds of shareholders far away from his business. Creating a smallish amount of affordable shares for the average Joe kept these businesses out of his knickers. Buffet also wants his Class-A shareholders to be able to divide their holdings amongst many heirs, which they can do by exchanging them for a larger number of lower priced Class-B shares. Splitting the B shares may be about keeping these two options open. Still, I'm surpirsed at the 50:1 ratio.

  • Report this Comment On November 03, 2009, at 2:40 PM, Samskiman wrote:

    While the 50-1 split may not make much sense, I'm excited about the increased trading volume we'll be seeing. It's likely going to mean a higher price as millions of buyers pile to in 100 shares of a $70 stock.

  • Report this Comment On November 03, 2009, at 2:41 PM, JGBFool wrote:

    I guess this means you can't go to the Berkshire Hathaway shareholders meeting any more if you only hold one share of BRK-B.

  • Report this Comment On November 03, 2009, at 2:50 PM, Samskiman wrote:

    JGBFool,

    Were the 'B' shareholders given tickets to the shareholder meeting?

  • Report this Comment On November 03, 2009, at 2:57 PM, brew8160 wrote:

    I also wonder if this means my discount on geico car insurance will still be good as a berkshire shareholder. It seems as though they wouldn't want to give the discount to everybody who owns one share as that number will increase significantly.

  • Report this Comment On November 03, 2009, at 3:00 PM, TMFGebinr wrote:

    Personally, I'm opposed to the 50-1 split of the B-shares. Buffett has said that he wants long term holders of his company's stock and the high price helped with that (even the lower-priced B-shares). Now if the B-shares get priced down to where everything else is, we're going to get a whole bunch of day traders and other short-term-minded people, worried about the daily or weekly or quarterly news, not long term investors.

    I was quite surprised when I read that and plan to vote my B shares against the split.

    Cheers,

    Jim

  • Report this Comment On November 03, 2009, at 3:05 PM, jmt587 wrote:

    A B share holder can go to the meetings. I got my lanyards for 2009, and only hold 1 B share. I think he even has it open to the public, though there may be some nominal fee if you aren't a shareholder. I'm not sure. I am pretty confident B share holders will still be able to go. I don't think he wants to cut down on his audience, or the revenue the event brings in to some of the Berkshire businesses.

  • Report this Comment On November 03, 2009, at 3:06 PM, jmt587 wrote:

    Jim, I think B shares are non-voting shares. No?

  • Report this Comment On November 03, 2009, at 3:09 PM, jmt587 wrote:
  • Report this Comment On November 03, 2009, at 3:10 PM, jmt587 wrote:

    Ah, it's 1/200th of a vote for a B Share vs. an A share. So now it will be 1/10,000th of a vote (well, assuming the measure passes).

  • Report this Comment On November 03, 2009, at 3:22 PM, Samskiman wrote:

    jmt587,

    Thanks for that meeting info. Never knew that about the B shares.

    I agree, Omaha counts on all that revenue every spring, wouldn't be good if it went away, even just marginally.

  • Report this Comment On November 03, 2009, at 3:33 PM, brew8160 wrote:

    Is it possible to convert 3 B shares into an A share without selling and buying back in?

  • Report this Comment On November 03, 2009, at 3:41 PM, DukeTG wrote:

    No, you cannot convert B-toA, only A-to-B (and it would take 30 shares, not 3).

    I have to say, as a single B-share owner I'm a little disappointed in the split. I was really proud the day I put together enough money in my IRA to buy my share. I feel like I just got kicked out of a really cool night club or something.

    Not that I've ever been in a really cool night club, but you can imagine what it'd be like...

  • Report this Comment On November 03, 2009, at 3:42 PM, brew8160 wrote:

    Nevermind, I feel very dumb right now. I'll blame it on daylight savings...

  • Report this Comment On November 03, 2009, at 3:45 PM, DukeTG wrote:

    lol. I hear ya brew.

  • Report this Comment On November 03, 2009, at 4:57 PM, holosys wrote:

    Next, Warren Buffett will buy the whole planet and Earth will be one big prosperous corporation.

  • Report this Comment On November 03, 2009, at 5:07 PM, 7footmoose wrote:

    the price seems high especially since he is known for buying under the published market price, the 22% he already owns was bought at substantially less than the price he's paying, can't argue with his past successes unless you focus on his oil and gas debacle

  • Report this Comment On November 03, 2009, at 5:12 PM, Ruhaan wrote:

    I am ambivalent about the situation. I wanted the B shares to be a little more affordable so people like me can add in drips.. between 500 to a 1000 was more where I was wishing. So I was hoping for a split but that factorization has gone too far in my estimation.

    I definitely do not like the idea of more volatility in B shares.. I read somewhere that people are already thinking about using option trading in B shares.. Kind of defeats the purpose.

  • Report this Comment On November 03, 2009, at 5:24 PM, Joemit wrote:

    Personally, I see nothing wrong with the split. While I understand the reticence based upon the comments, such at inviting "day traders", I don't see what would stop that ilk right now.

    I would not object to a split of A shares, but that is not likely at this time.

    I own no shares of either A or B at this time.

  • Report this Comment On November 03, 2009, at 5:32 PM, impressd7 wrote:

    I'm so glad to hear there are others proud of their one share (though it be "B").

  • Report this Comment On November 03, 2009, at 5:40 PM, miteycasey wrote:

    I think it will raise the price of 'B' because more people can afford it.

    Just ask 'who wants to buy shares of Berkshire Hathaway'.

    The pot of people who can afford it just got bigger.

  • Report this Comment On November 03, 2009, at 6:02 PM, LookThinkJump wrote:

    Buffet has always been the first to advise investors to NOT purchasing his B shares. Doesn't anyone read his letters?

  • Report this Comment On November 03, 2009, at 6:06 PM, mmellars wrote:

    For the last week or so I have been seriously toying with the idea of buying B shares. So being new at buying stocks I wondered if it I should go ahead and buy before the split or wait until after. A basic question but there's quite a bit of my hard earned money involved.

  • Report this Comment On November 03, 2009, at 6:13 PM, oldstanton wrote:

    Thought I was being smart buying B share at little over $4,000 on what I thought was a dip from $5,000 then they proceeded to decline and come back to $3300. Didn't feel so smart. Guess I like idea of 50-1 split. Gives you some shares to sell if you need to without selling it all.

  • Report this Comment On November 03, 2009, at 6:40 PM, mythshakr wrote:

    I've been a train nut all my life but other than a brief ownership of some KSU I have stayed away from railroad stocks for the the reasons Charlie Munger articulated. I don't see anything that has changed.

    I kind of feel like Buffet and Munger now saying the tea leaves are now properly aligned is comparable to Bush II saying the Iraq war was necessary because of all those WMDs they had stockpiled.

    The animosity between management and labor is just so deeply entrenched throughout American railroads that I see no avenue towards any changes that would benefit shareholders or shareholder value.

    I don't own any SA recommended CN either for exactly the same reasons and I see no reasons to change my mind.

  • Report this Comment On November 03, 2009, at 6:41 PM, mythshakr wrote:

    I've been a train nut all my life but other than a brief ownership of some KSU I have stayed away from railroad stocks for the the reasons Charlie Munger articulated. I don't see anything that has changed.

    I kind of feel like Buffet and Munger now saying the tea leaves are now properly aligned is comparable to Bush II saying the Iraq war was necessary because of all those WMDs they had stockpiled.

    The animosity between management and labor is just so deeply entrenched throughout American railroads that I see no avenue towards any changes that would benefit shareholders or shareholder value.

    I don't own any SA recommended CN either for exactly the same reasons and I see no reasons to change my mind.

  • Report this Comment On November 03, 2009, at 7:00 PM, mfltcipro wrote:

    So what does this tell us about the Fool's story about the "New Silk Road?"

  • Report this Comment On November 03, 2009, at 8:20 PM, LessGovernment wrote:

    All day long I had to watch the Warren Buffet show whether it was on MSNBC, Fox, Bloomberg, CNN, ABC, NBC, what ever, it did not matter. All day long, if you tuned in, you were told that Warren Buffet had made a big bet on America.

    Oh really? He bought a railroad. Was that the big bet on America? He already owned 30% of the railroad prior to today, so if buying the railroad was the big bet, then in reality it was only 70% of a big bet on America. Obviously, I see it differently.

    Buffet (Berkshire Hathaway to be more exact) was sitting on billions and billions and billions of dollars at a time when dollars are steadily losing value. A big bet on America would have been to keep holding dollars betting the dollar will strengthen. That my friends, would have been a big bet on America.

    But he didn't do that. He did the opposite. He converted his dollars to hard, money making assets. He bought the remaining portion of a railroad that he did not already own, a railroad that traverses from the West coast's sea ports to the heartland's coal fields, grain belts, lumber mills, and ore mines, a railroad able to transport goods both to and from the major West Coast sea ports that are the gateways to China. And in the process, he was able to close out his dollars to something safer.

    Don't get me wrong. This was a really good investment. Smart. Very smart. However, I fail to see how being instrumental in the changing of ownership of an existing railroad is a big bet on America. The needless spin was nauseating.

  • Report this Comment On November 03, 2009, at 8:32 PM, fgraham65 wrote:

    Warren will have to change his attitude about extremely over paid execs OR fire the CEO of Burlilngton Northern. When I owned the stock the CEO was very highly compensated and received huge bonuses regularly.

    fgraham

  • Report this Comment On November 03, 2009, at 9:51 PM, MAURY56 wrote:

    Looks like the FOOL has been spammed by some guy selling stuff.

  • Report this Comment On November 03, 2009, at 10:54 PM, thunderbob wrote:

    I'm quite happy as I have a rather large holding of BNI with a basis less than $10. I plan to take as much of the "B" shares as I am allowed. I feel the split was as Buffet said, " To help out those share holders who would suffer a large tax liability by his purchase."

    I also have a few shares of "B" which will multiply by 50 which is a good thing.

    I also have some BNI in an IRA which I plan to take all in cash, so you see I am very happy.

  • Report this Comment On November 04, 2009, at 1:19 AM, thisislabor wrote:

    I think his purchase makes sense.

    Buy the railroad now 2 years after he came out saying he wants railroads. 2 years is enough time for everyone to forget about buying railroads so price drops because oil is cheap.

    give oil another 5 years. and you will see it sky rocket again.

    I think his purchase makes a ton of sense 5 years out from now. well maybe even as far as 7.

    but oil will go nowhere but up, and US has largest and cheapest coal reserves in world.

  • Report this Comment On November 04, 2009, at 4:20 AM, globalsailor wrote:

    What I'm surprised about is how people are willing to pay around 1/31 of the price of an A share for 1/200 of a vote of an A share. How can you not say that you are buying something that is ridiculously overvalued? Please send me some sort of comment if you can explain this to me.

  • Report this Comment On November 04, 2009, at 6:48 AM, Ibeatmykids wrote:

    I own a B share and I don't vote. I don't even want to vote. Thats not why I paid $3,500 for a share. I will leave the voting up to others that are more educated and succesful enough to own the A shares.

    I am against the split. My share will not feel nearly as cool to me if that happens.

  • Report this Comment On November 04, 2009, at 8:24 AM, TMFGebinr wrote:

    jmt587,

    I seem to remember reading that it is the B-class owners who will vote on the split of their shares.

    Yeah, here we go: "Holders of the relatively low-cost shares will vote on a 50-for-1 stock split, already approved by the Berkshire Hathaway board. The date of the vote has not been set." http://finance.yahoo.com/news/Berkshire-Hathaway-OKs-50for1-...

    Cheers,

    Jim

  • Report this Comment On November 04, 2009, at 11:03 AM, chcreative wrote:

    I think the acquisition is depressing because it's based ultimately on the assumption that we're going to be petroleum-dependent for the foreseeable future and freezes the possibility of any Berkshire investment in alternative energy. Charles Harding

  • Report this Comment On November 04, 2009, at 11:16 AM, DukeTG wrote:

    Ibeatmykids is right. The 1/200th voting power is basically meaningless. An A share is convertible into 30 B shares. So a B share should be worth about 1/30th of an A share (which it usually is, more or less). The value in the stock comes from the amount of ownership you have in the company, not how much voting power you have.

    I would have bought my B share at the same price if it had no voting power at all.

  • Report this Comment On November 04, 2009, at 11:29 AM, louise0287 wrote:

    Yes railroads might have all those things that you mentioned above going against them but there is one thing that they do have going for them and it was given to them by the USA government and that is Land, Land and more Land.

  • Report this Comment On November 04, 2009, at 11:42 AM, dymty wrote:

    What's the likelihood of converting to LNG turbine locomotives? It's not a new idea. Maybe Buffet could kill two elephants with one shot? Interesting to see what his holdings are in gas.

  • Report this Comment On November 04, 2009, at 1:39 PM, paducah5102 wrote:

    Now, if he would just pay us a dividend, that would be welcome news!!!

  • Report this Comment On November 04, 2009, at 3:10 PM, CarrieMike wrote:

    Buffet did not want his shares of B trading up and down by day traders so he kept the stock price up there, but in the last year or so, day traders have bought into the Baby B's and made them more volatile. Perhaps he has recognized that he can't keep them away.

    I second the call for dividends but, having met Buffet and discussed this with him, I know his principles are against it.

  • Report this Comment On November 04, 2009, at 9:40 PM, forestfarmer wrote:

    I'm happy as Heck about this. I've owned BNI for years, basis is now only $2.66, so I will take as much as I can in stock. Already owned 4 of the Berkshire class B shares, so just adding to my position. I suspect the split is primarily to give smaller BNI stockholders the option of taking Berkshire stock, instead of cash. Daytraders have been in the stock for a while, you really can't keep them out. In the short run, "Mr. Market is a voting machine, but in the long run it is a weighing machine" (paraphrasing Ben Graham); the true value of Berkshire will become more evident over time. Now, if Berkshire can just start paying a dividend, say 3.5% with dividend growth 6-10% per year! Then I'll be ecstatic!!!

  • Report this Comment On November 05, 2009, at 12:23 AM, danwickell wrote:

    Berkshire will never pay a dividend. Buffet is too greedy to pay taxes on the dividend. Had Berkshire paid dividends the last 40 years, Buffet would have 1/2 the money he has and the rest of us wouldn't have to pay the taxes we do.

    Gates' special dividend added 1.3 to the us GDP the year Microsoft paid it.

  • Report this Comment On November 05, 2009, at 3:51 AM, OklaBoston wrote:

    I basically approve of the split. at $3300 a share it would cost some people their entire life savings (or uncomfortably close to it) to buy a round lot. That should not be the case with ANY stock, on general principle, to me.

    People into day trading are going to be looking for stocks with more volatile earnings or smaller market caps than Berkshire Hathaway anyway, I believe. If I'm wrong about that, (as I know I could be) please explain why.

  • Report this Comment On November 05, 2009, at 4:06 PM, rritterson wrote:

    a 50-1 split in brk.b that causes a rise in volatility presents interesting arbitrage opportunities if you can buy brk.a and convert it to B quickly enough. What's the time frame on share exchanges?

  • Report this Comment On November 06, 2009, at 12:00 PM, golfamatic wrote:

    Love the timing of the BNI deal; because couple weeks ago, that blow-hard Dennis Gartman was on CNBC's 'Fast Money' popping off about what a 'disaster' the rails are and will continue to be based on dip in Dow Transport Index. Ever notice how Gartman has ALL the answers; is NEVER wrong; and has NEVER made a bad or wrong bet in the market??

    Rather upbeat CNI conference call coupled with Mr Buffet's aquisition of BNI tells me that this is the place to park some big iron.

  • Report this Comment On November 06, 2009, at 1:38 PM, Cetamura wrote:

    Well, I don't own any shares but I'm surprised that nobody is questioning the logic behind the acquisition ( and at that price). I'm personally not convinced but I guess that when Saint Warren speaks nobody dares to ythink with their own head ( right or wrong).

  • Report this Comment On November 06, 2009, at 1:45 PM, deanjens wrote:

    Round lots don't matter these days (unless I wanted to write a covered call on my holdings). I've thought a 5-1 split would be nice, not with the idea that a lot of people would hold a single share at $680, but that you could then calibrate the size of your holdings in that size increment (rather than decide whether to buy/sell a full $3400 or nothing). 50-1 seems to go a bit far, though.

    I do also worry about the price of this deal, as well as the size. It's interesting that mention was made that the previous largest acquisition was General Re, without noting that it didn't pan out all that well (though hopefully most of the trouble is behind us).

  • Report this Comment On November 06, 2009, at 1:47 PM, deanjens wrote:

    Oh, yes, I made the off-handed reference to covered calls, and I wanted to note these two possible consequences of the 50-1 split: exchange-listed options are likely to develop if there's a 50-1 split, and I think it's likely the B shares would be added to the S&P 500 (though I don't know how different classes of shares have been handled there before; Google's public share class is in the S&P, isn't it?)

  • Report this Comment On November 07, 2009, at 5:11 PM, stockician wrote:

    What surprises me is the fact that Buffet chose to buy BNI when there is widespread greed and BNI was trading in the 70s as opposed to buying in March when there was blood on the streets and BNI was trading in the 50s.

  • Report this Comment On November 08, 2009, at 5:55 PM, hamsamett wrote:

    I think this is a great investment for the future. I have owned B shares for years and look forward to the split.

  • Report this Comment On November 10, 2009, at 4:36 PM, docmjr1 wrote:

    First, Buffett bought arguably the best run RR is the US. BNI has spent $$$$ upgrading their engines and railroad cars to take advantage of increasing rail traffic. I've seen those unending 100 car coal trains coming out of the Powder River Basin in WY and it's quite a site. I noticed a few years ago that most of the coal cars were new, which spoke volumes to the future of that part of the business as it wasn't long ago that BNI management had stated they saw no need to invest in new rolling stock. That changed...and how.

    Second, BNI is one of the industry leaders in computerizing their rolling stock so that thye know where every car is at all times. Efficiency is the idea here and BNI is efficient.

    Regarding the 50:1 split....the only thing I can think of is to make the "B" shares more attractive to more investors. Pretty weak answer as I really don't know nor do I have an opinion one way or another whether it's good or bad.

    Docmjr

  • Report this Comment On November 15, 2009, at 9:05 PM, rovobo wrote:

    being a neophyte at stock analysis I can only say buffet is a man of integrity and his ability to make smart moves in the market is,I think beyond your average stock advisor or wall street blowhard. Try reading the book LIARS POKER to see who is investing your money and how they do it.

    NUFF SAID

  • Report this Comment On December 08, 2009, at 6:40 PM, yousuck01 wrote:

    I just happened to purchase 10 shares of BRK-B and I am not at all happy with the 50 to1 split!!! It is part of my IRA and now I don't think Warren was thinking at all about the common man! I felt it a great priviledge to own a stock that wouldn't split.Guess I won't be peeing with the big dogs ANYMORE!!!

  • Report this Comment On December 13, 2009, at 12:16 AM, snickerdoodle9 wrote:

    my thought of the 50-1 split of brk.b is the same as some of the above posts ; to make the price more attractive to new investors . i own 5 shares . i don't think that after 40+ years of being the ceo of a well run company as berkshire hathaway that he's suddenly said , " to hell with the shareholders " without giving his decision careful consideration . when he gave away shares of brk.b to the bill and malinda gates foundation , i had people ask me if i had heard the announcement . my reply was , " yes i'm all for it " . the price of the stock has climbed since .

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