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OMAHA, Neb. – Billionaire Warren Buffett likes to compare his company to a masterpiece that he’s been painting for nearly five decades, and the deal he announced last week will permanently alter the color of Berkshire Hathaway Inc.’s portrait.
The 79-year-old investor plans to add a brilliant orange section to the painting for the brightly colored locomotives of Burlington Northern Santa Fe Corp. Berkshire will pay $23.6 billion in cash and stock for the shares of the company it doesn’t already own. The total value of the company is $34 billion.
It will be the biggest deal yet in a career of big deals.
Buffett described it as an “all-in wager on the economic future of the United States,” but it’s also transformative for his Omaha-based company. It will make freight railroads Berkshire’s third-largest industry after insurance and utilities.
“I think it’s classic Buffett,” said Andy Kilpatrick, the stockbroker-author who wrote “Of Permanent Value: The Story of Warren Buffett.”
Buffet’s Berkshire prefers to buy companies instead of just investing in stocks, and Buffett has simple standards for what he looks for in an investment: easy-to-understand large companies with a strong competitive advantage that generate cash and above-average returns on capital.
Just a few weeks into the stock market collapse that began in September 2008, Buffett wrote an opinion column for the New York Times headlined “Buy American. I am.” The column encouraged investors to buy U.S. stocks, as he was doing with his personal investments outside of Berkshire.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” he wrote, repeating an axiom he’s used for years.
Throughout the nation’s economic struggles of the past two years, Buffett and Berkshire have been busy making deals, but few of those were outright acquisitions. Recent big transactions include investing $6.5 billion in equities related to Mars Inc.’s acquisition of Wm. Wrigley Jr. Co., $5 billion in preferred shares of Goldman Sachs Group Inc., $3 billion in General Electric Co. and $2.6 billion in Swiss Reinsurance Co.
Last year, Berkshire failed in its attempt to buy Constellation Energy Group Inc. But even failure was profitable because of the breakup terms.
Berkshire’s utility division MidAmerican Energy Holdings received 20 million Constellation shares and $593 million in cash last year after Baltimore-based Constellation rejected MidAmerican’s $4.7 billion takeover bid in favor of a deal with Electricite de France SA. MidAmerican has since sold the Constellation stock.
Buffett hasn’t gone through the recession mistake-free. He acknowledged this year that he shouldn’t have bought 79.9 million shares of ConocoPhillips stock when oil and gas prices were near their peak.
But Berkshire has partly made up for that misstep by selling some of the ConocoPhillips stock to generate a loss to offset past capital gains taxes.
Over the years, Buffett’s company has bought more than 60 subsidiaries; including clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms, and it has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.
Berkshire’s biggest previous acquisition was the $16 billion stock purchase of reinsurance giant General Re announced in 1998.
Analysts who follow Berkshire say the Burlington Northern deal will reshape the company because of the railroad’s size. Justin Fuller, who works with Midway Capital Research & Management in Chicago and writes about Berkshire online at www.buffettologist.com, said this is the kind of elephant deal that Buffett seems to be able to find every five or six years.
Buffett has said he realized a few years late that railroads had become an appealing investment because they are healthier today than in past years. Berkshire is buying one at a time when railroad profits are down because of the recession. But as diesel prices rise, shipping by rail instead of truck will only become more attractive.
“It’s a very effective way of moving goods. I basically believe this country will prosper and you’ll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit,” Buffett told CNBC last week.
Morningstar analyst Bill Bergman said he thinks Berkshire’s acquisition is consistent with Buffett’s long-term philosophy, and the timing is good for the investment.
