The True Genius of WEB Is Embedded Within Burlington!

[Guest ValueCarl]

"Mr. Market is there to serve you, NOT instruct you." Graham/Buffett

 

Those dubious, one sided, ridiculously overpaid investment bankers attempting to DUPE WEB out of fair VALUE and corresponding exchange rates, got exactly what was coming to them while he purchased the 25 percent disparity in the public marketplace before all had been said and done!

 

The man's a genius who still camouflages the real story in fictional accounts that really apply directly, yet are DIFFICULT for the NAKED EYE to capture its RAW ESSENCE. imo     

 

An Inconvenient Truth (Boardroom Overheating)

Our subsidiaries made a few small “bolt-on” acquisitions last year for cash, but our blockbuster deal

with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously

outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.

The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the

current market price, why in the world should we “sell” a significant part of the company at that same inadequate

price by issuing our stock in a merger?

In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on

the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver

them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are

selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You

simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically

worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence

and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100

per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic

value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders

of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone

at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large

as his original domain, in a world where size tends to correlate with both prestige and compensation.

16

If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s

advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of

stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in

effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s

having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this

way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is

plenty of private snickering.)

In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share.

The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie

and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of

BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was

paid with Berkshire shares.

In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was

offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and

liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We

also like the prospect of investing additional billions over the years at reasonable rates of return. But the final

decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made

no sense. We would have then been giving up more than we were getting.

* * * * * * * * * * * *

I have been in dozens of board meetings in which acquisitions have been deliberated, often with the

directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers

give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is

worth far more than its market price. In more than fifty years of board memberships, however, never have I heard

the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the

issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though

they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its

real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from

an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should

hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not

going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t

ask the barber whether you need a haircut.”

* * * * * * * * * * * *

I can’t resist telling you a true story from long ago. We owned stock in a large well-run bank that for

decades had been statutorily prevented from acquisitions. Eventually, the law was changed and our bank

immediately began looking for possible purchases. Its managers – fine people and able bankers – not

unexpectedly began to behave like teenage boys who had just discovered girls.

They soon focused on a much smaller bank, also well-run and having similar financial characteristics

in such areas as return on equity, interest margin, loan quality, etc. Our bank sold at a modest price (that’s why

we had bought into it), hovering near book value and possessing a very low price/earnings ratio. Alongside,

though, the small-bank owner was being wooed by other large banks in the state and was holding out for a price

close to three times book value. Moreover, he wanted stock, not cash.

Naturally, our fellows caved in and agreed to this value-destroying deal. “We need to show that we are

in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a

legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog

that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

17

The seller of the smaller bank – no fool – then delivered one final demand in his negotiations. “After

the merger,” he in effect said, perhaps using words that were phrased more diplomatically than these, “I’m going

to be a large shareholder of your bank, and it will represent a huge portion of my net worth. You have to promise

me, therefore, that you’ll never again do a deal this dumb.”

Yes, the merger went through. The owner of the small bank became richer, we became poorer, and the

managers of the big bank – newly bigger – lived happily ever after.

[gurjot]

great letter to new shareholders!

is it only me or by splitting class b shares and being added to sp500 price of berkshire has gone up 22%.

which equals to about what berskhire paid for burlington including debt??

[mpauls]

He paid a pretty penny and I'm certain he would not have paid a penny more.  He paid for something he usually doesn't pay for.   

[Phoenix01]

That sort of makes you wonder why he was so eager to get rid of his cash and take possession of hard assets.

[kapilm]

I am wondering the same too. I think WEB is making sure he is covered for the coming inflation.

[woodstove]

Inflation coverage, I agree.  Another motivation might have been to put an end to the concept that Berkshire's deep pockets could be looked to, for rescues, and might in the political context be hard to refuse.  Buying Burlington, with some share issuance to make up the capital requirement, says he is all tapped out - even if not actually, it provides content for popular media articles.

 

The share split, widening shareholder group and getting included in index, is good risk protection for popular dislike of exploitative financial firms.  Berkshire is looking like upwards of 1 pct of US GDP, I'll guess.

 

And finally, Burlington is a great purchase, just like Mid-American.  If rates are low, debt finance in public market.  If rates are high, ie Berk-utilities are seen as risky (because all in the industry are seen as risky, for instance), then self-finance, getting great returns into insurance subs, and being able to monitor or control risk so there is not really as much risk as market is pricing into corporate bonds.  Nice balance.