"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.
