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Berkshire to Buy Burlington Northern for 34B


Uccmal
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i bought my first stock in 1988, and that was berkshire. i didnt know diddlely at the time, but i sensed web & brk was something special, a breed apart. i own only a token amount now, but web & brk will always be the first one i turn to for perspective, uncommon common sense, rationality, & inspiration that goes beyond investing.

 

looks like warren finally bagged his elephant! 

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Subject to shareholder approval which they may not get.  The reason provided is to accomodate small volume holders of Burlington.  If shareholders reject, as I suspect they will -- some strange pride thing about owning the current B's, then Berkshire will probably cash out these small shareholders.

 

-O

 

Hi Al:  But you forgot to mention that BRK is splitting its B shares 50 for 1.  Cheers, Jim

 

See:  http://www.berkshirehathaway.com/news/NOV0309SPLIT.pdf

 

 

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I must admit shock at the 50 for 1 split of the B shares. For the longest time WEB said that he would never do something like this. I fear the split will encourage speculators, over time, to move in. While the acquistion is an excellent long-term investment, I question the split as another small dilution of the "Berkshire brand". Would WEB split the "A" shares next and eliminate the dual-share structure? My worry is the BRK has always been business-partners, making long-term investments, and the high share price required a commitment on the part of investors. If we split the stock, do we dilute this and go from partners investing in pieces of businesses to investors (speculators) trading pieces of paper?

 

cheers

Zorro

 

 

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My worry is the BRK has always been business-partners, making long-term investments, and the high share price required a commitment on the part of investors.

 

But the share price hasn't always been high.  How did he manage to have business-partner like shareholders back when the stock was as low as it is now going to be once again?

 

As long as he doesn't get into the forecasting game of managing earnings, then all should be well.

 

FFH's stock price for example is only 10% of Berkshire B shares, does this mean that shareholders have only 10% of the long-term focus?

 

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I must admit shock at the 50 for 1 split of the B shares. For the longest time WEB said that he would never do something like this. I fear the split will encourage speculators, over time, to move in. While the acquistion is an excellent long-term investment, I question the split as another small dilution of the "Berkshire brand". Would WEB split the "A" shares next and eliminate the dual-share structure? My worry is the BRK has always been business-partners, making long-term investments, and the high share price required a commitment on the part of investors. If we split the stock, do we dilute this and go from partners investing in pieces of businesses to investors (speculators) trading pieces of paper?

 

cheers

Zorro

 

 

 

My initial reaction echoes yours Zorro, however, as with most things Buffett, some additional thought has seen some wisdom in this.  Why not have speculators wreak havoc with the stock price?  I will always regard my stock as a piece of a business - and quite frankly I have been under-served by Mr. Market with respect to my BRK.B holdings.  I welcome some wild price fluctuations - with a good handle on value it provides me with an amplified opportunity to either buy at a discount or sell at a premium.  This is a luxury we haven't enjoyed except in times of general market turmoil or exuberance.

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Well, some FFH holders had less focus otherwise the shorts attack would have had far less success than it did. When BRK's price was last at this level, WEB was building the company into what it is today so your comparison is not really valid. I don't want to lose that focus on "Business partners" and see BRK become just another conglomerate once WEB is gone.

 

My worry is the BRK has always been business-partners, making long-term investments, and the high share price required a commitment on the part of investors.

 

But the share price hasn't always been high.  How did he manage to have business-partner like shareholders back when the stock was as low as it is now going to be once again?

 

As long as he doesn't get into the forecasting game of managing earnings, then all should be well.

 

FFH's stock price for example is only 10% of Berkshire B shares, does this mean that shareholders have only 10% of the long-term focus?

 

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I'm personally happy about the split.  This way options trading will become available to the little guy (selling puts to acquire for example).  Also since there are A shares won't there be a built in kind of arbitrage that will keep the B shares from getting too volatile?  (I don't think you can exchange Bs for As, but still the arbitrage is implicit in the value of the shares no?)

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A nice chunk of cash for FFH as well ..  they own at least 2.09 million shares.

 

I was wondering why FFH was down somewhat today, only a 40+ million gain from yesterday. :)

The share price seems to have an inverse relationship to results.

 

Dan

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I must admit shock at the 50 for 1 split of the B shares. For the longest time WEB said that he would never do something like this. I fear the split will encourage speculators, over time, to move in. While the acquistion is an excellent long-term investment, I question the split as another small dilution of the "Berkshire brand". Would WEB split the "A" shares next and eliminate the dual-share structure? My worry is the BRK has always been business-partners, making long-term investments, and the high share price required a commitment on the part of investors. If we split the stock, do we dilute this and go from partners investing in pieces of businesses to investors (speculators) trading pieces of paper?

 

cheers

Zorro

 

 

 

I don't really understand objection to the split. The B shares will still follow the A shares over time, so I wouldn't worry too much about speculators.  I'm more concerned with the share dillution and BRK taking on $10 Billion in BNI's debt than I am with a stock split.

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A couple of interesting points from the article below (currently reading Update 3).  BRK will spend $26B in cash and shares.  BRK reported $24B on the balance sheet on 30 June.  I recall Buffett wanting to maintain a minimum $20B cash position as contingency (correct me if I'm wrong) in the holding company -- after all, they insure/re-insure significant risk positions.  The implication here is that BRK has been generating some considerable cash in the past quarter to put into this acquisition -- and probably indicates why Moody's was being sold off.  Has anyone seen a cash/stock ratio?  I'm assuming that most BNI shareholders would take stock for tax efficiency plus cash for rounding down partial shares.

UPDATE: 40% stock, 60% cash -- Buffett on CNBC this morning

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=asfU7Dluabw4&pos=1

The purchase, the largest ever for Berkshire, will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn’t already own.

 

At $100 a share, Buffett is paying 18.2 times Burlington’s estimated 2010 earnings of $5.51, according to the average analyst projection in a Bloomberg survey.

 

-O

 

Have a look at the BRK news release at http://www.berkshirehathaway.com/news/NOV0309.pdf about the takeover.  It is the largest acquisition that BRK has ever made and I guess represents the elephant for which we have all been patiently waiting.

 

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Guest longinvestor

A nice chunk of cash for FFH as well ..  they own at least 2.09 million shares.

 

I was wondering why FFH was down somewhat today, only a 40+ million gain from yesterday. :)

The share price seems to have an inverse relationship to results.

 

Dan

It is kind of funny to see impatience on this board with each FFH price gyration esp downwards. Also, it looks like spoilt holders here (spoilt with ridiculously cheap FFH) are expecting manna from somewhere to suddenly "find" FFH and drive the share price up. Newcomers to the FFH party, like always, will "find" it too late, meaning when there is cheery consensus. Now with thin trading, it is going to take longer than other the typical stock out there.  Come on, how many other stocks can we be banking on getting to cheery consensus? Now, is'nt that something? I would not be wondering about FFH price today or tomorrow with this prospect in mind.

 

 

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You are right....from 10Q

 

At June 30, 2009, Alleghany had a concentration of market risk in its available-for-sale equity securities portfolio of common stock of

Burlington Northern Santa Fe Corporation (“Burlington Northern”), a railroad holding company, amounting to $73.5 million. During the first

six months of 2009, Alleghany sold approximately 2.0 million shares of Burlington Northern common stock, resulting in a pre-tax gain of

$113.1 million. During the first six months of 2008, Alleghany sold approximately 1.0 million shares of Burlington Northern common stock,

resulting in a pre-tax gain of $78.1 million.

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WB mentions rails is the "greenest" of all transportation...Is there a way to monetize that via proposed cap n trade regulations ? If yes, then it can probably balance out the MidAmerican coal plants which are definitely going to get hit by increased taxes...

 

 

 

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If my memory serves me correctly (and it may not) didn't CNN try to buy BNI a few years back and the deal was scuttled by the government?

 

That is correct.  Anti-trust regulators in the US scuttled the deal.  Should not be a problem for BRk. 

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The one thing I've questioned about Buffett in recent years is his purchase of companies with hard-to-predict earnings. BNI is a very cyclical company.  Holding stock in BNI, he could buy during downturns and sell (or lighten up on his position) during good times, but BNI could weigh down Berkshire in future recessions. Purchases of cyclical companies like this, Conoco, and the carpet and housing material companies he was buying in 2006, goes against Warren's primary investing focus, no? I understand he's changed his approach over the years, but it seems like he's been buying more and more companies that that seem difficult to predict. BNI at this price does not seem like a bargain to me, but who am I to second guess WEB.

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I don't know BNI but looking at the financial statement.

 

Is that just me or is it borderline pricey?

Most railroad have huge hidden assets is it what he is going after?

Or is it just that BRK size, forces it to buy to such a high PE multiple?

 

I guess Warren regrets the days where he could buy Sees Candy for lower PE then BNI  :)

 

BeerBaron

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