In this May 2, 2009 file photo, Warren Buffett, CEO of Berkshire Hathaway, right, waves to shareholders prior to the annual Berkshire Hathaway shareholders meeting in Omaha, Neb. Warren Buffet's Berkshire Hathaway said Tuesday, Nov. 3, 2009, it has agreed to buy Burlington Northern Santa Fe in a deal valuing the railroad at $34 billion.(AP Photo/Nati Harnik, file)
Berkshire Hathaway Inc., an international conglomerate holding company run by Warren Buffett, announced today that it agreed to buy Burlington Northern Santa Fe Corp. (BNSF) in a cash and stock trade worth $34 billion. BNSF is the second largest railroad in the nation and transports more shipping containers than any other company in the world.
BNSF stock (BNI) soared 20.93 percent on the announcement to close at $97. Buffett's acquisition represents a 31.5 percent premium over the stock's Monday closing price.
The acquisition is the largest one ever for billionaire investor and philanthropist Buffett. Known as the "Oracle of Omaha" for his prognosticating acumen, Buffett also owns stakes in two other railroad companies, indicating that his interest spans the entire railroad industry.
Analyst opinion is mixed about why Buffett chose to make such a massive investment now. Buffett's interest in railroad stocks began in July, 2007, with his acquisition of 10.9 percent of BNSF, as well as 2 percent of Union Pacific and less-than-1 percent of Norfolk Southern. At the time, analysts were mainly puzzled by the move, given that BNSF then traded for more than three times book value and that the company had mediocre liquidity and substantial debt. Some of the possible reasons given for Buffett's original investment included his concern about globalization issues, especially trade with China.
Many analysts are seeing Buffett's Burlington acquisition as a "bet" on the US economy: the economy is at its bottom, and as it improves, BNSF income will rise and thereby appreciate Buffett's investment. Unfortunately, contrary to this line of reasoning, there are other reasons that Buffett might make this investment, and they do not necessarily indicate that he thinks the economy will improve.
HR 2454, The American Clean Energy and Security Act of 2009, passed the House on Jun 26. This is the bill that would set carbon emissions for companies and enable the trading of emissions credits. According to the BNSF website, "American railroads move 40 percent of our nation’s freight, but account for just 2.2 percent of all transportation-related greenhouse gas emissions.” In other words, under the legislation, BNSF might potentially be worth billions in tradable carbon credits, value that does not currently exist in the company.
Additionally, BNSF is the largest transporter of shipping containers in the world, which incidentally means that the company is deeply involved in trade with China. In the future, BNSF's involvement with China trade can only grow. This makes BNSF a strategic entity and a theoretical candidate for industry bailouts and subsidies from the Obama administration. Given Buffett's close relationship with the President, and his earlier investments in investment bank Goldman Sachs and General Electric, Buffett has already proven himself adroit in obtaining government funding for his investments.
Any investment by the "Oracle of Omaha" should be evaluated in light of his relationship with the President and all relevant pending legislation.
Other Buffett news at Examiner.com
Buffett's Berkshire buying Burlington Northern RR
http://www.examiner.com/a-2300922~Buffett_s_Berkshire_buying_Burlington_Northern_RR.html?cid=rss-Business
Chinese train project offers clues to Warren Buffett investment
http://www.examiner.com/x-7944-Warren-Buffett-Examiner~y2009m8d6-Chinese-train-project-offers-clues-to-Warren-Buffett-investment
Stocks fall as Buffett deal brings modest comfort
http://www.examiner.com/a-2301002~Stocks_fall_as_Buffett_deal_brings_modest_comfort.html
== Outlinks ==
Buffett's Berkshire buying Burlington Northern RR
http://news.yahoo.com/s/ap/20091103/ap_on_bi_ge/us_berkshire_burlington_northern
BNSF (Burlington Northern Santa Fe) Facts
http://www.bnsf.com/media/bnsffacts.html
Just How Big Is Buffett’s Burlington Northern Bet?
http://blogs.wsj.com/deals/2009/11/03/how-big-is-buffetts-railroad-bet/
Billionaire Buffett benefits from bailout he promoted
http://www.sacbee.com/investigations/story/1756261.html
Buffett’s Wager on Economy May Give Boost for Obama Policies
http://www.bloomberg.com/apps/news?pid=20601070&sid=apki4XIflA2k
H.R. 2454: 2009-2010 American Clean Energy and Security Act of 2009
http://www.govtrack.us/congress/bill.xpd?bill=h111-2454
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