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Written by: Justin Daniel Lawlor
Warren Buffett, the second richest man in the world and chairman and CEO of Berkshire Hathaway Inc., turned 79 this past August. But clearly, age alone will not slow this man down. Buffett continues to lead, learn, invest, and actively manage Berkshire’s extensive portfolio of insurance, specialty jewelry and clothing, food and beverage, and utilities companies.
And as recent news would suggest, Buffett is looking to enhance Berkshire’s utilities holdings with the acquisition of railroad company Burlington Northern Santa Fe.
The deal, which was announced last Tuesday, is expected to close in early 2010 and is valued at approximately $44 billion- Berkshire’s largest acquisition to date. Prior to the deal’s announcement, Berkshire owned 22.6% of Burlington Northern and the complete buyout will be partially funded by shares of Berkshire stock.
As a result, Berkshire’s class B shares will split 50-1, bringing the price per share to approximately $65 from its previous level of $3,325.00. Investors can rest assured that class A shares of Berkshire stock will continue to trade within their notoriously high price range of $100,000. Stock splits are a corporate action that Buffet has long opposed, but as he claimed on CNBC’s Squawk Box last Wednesday, “The small shareholder can now have exactly the same availability that would have only been available to a big shareholder.”
As of late, Buffett has found himself in the midst of a common dilemma for successful investors and money managers: a surplus of cash and a shortage of adequate investment opportunities. As of Berkshire’s most recent quarterly filing, cash and cash equivalents were reported at $23.8 billion.
That is simply an astonishing sum and minor multimillion dollar investments can no longer produce significant material gains due to Berkshire’s size. And Buffett recognizes this predicament: “Size is always a problem. With tiny sums to invest, it’s extraordinary what you can find. Most of the time, big sums are one hell of an anchor.”
Buffett’s bet on Burlington Northern represents his optimistic outlook for both the railroad industry and the overall U.S. economy. Buffett and his colleagues at Berkshire have been historically bearish on the railroad industry, as these companies are highly capital-intensive, heavily regulated, and face stiff competition from the trucking industry. Yet due to recent oil price increases and a shift in focus to environmentally friendly business practices, the railways begin to look slightly more attractive.
Furthermore, transport via railroad is reliant upon coal supply and cost. The Energy Information Administration foresees sharp increases in coal supply over the next 20 years. Under the Obama administration, spending on infrastructure and public construction projects may pick up a trend that Burlington Northern would surely benefit from.
In fact, more than 60 percent of Burlington’s revenues are from the shipment of building and construction products.
In the words of Buffett, “It’s an all-in wager on the economic future of the United States. I love these bets.”
Full Disclosure: At the time of writing, Justin Lawlor owned shares of Berkshire Hathaway Inc. His positions may change at any time.
{ 4 comments }
I’m convinced that the author simply wrote this article to state to the Bentley community and the world that he owned shares in Berkshire Hathaway. Just because he owns shares in a company which is currently trading at over $100,000 a share, doesn’t matter to anyone and only proves further he is a stereotypical Bentley kid with $100,000 available to him at his disposal and a trust fund to fall back on to help finance his Bentley education.
George: What an outrageous assumption you make about the author – and you couldn’t be more wrong! The editor of the paper requires the disclosure about owning the stock in the company that is the subject of the article. The author is anything but a “stereotypical Bentley kid with $100,000 available to him at his disposal.” He’s an intelligent, hard-working student from a middle-class New Hampshire family. The stock ownership comes from money earned while working at Dunkin Donuts, cutting lawns, and other jobs he had in high school when he bought the stock. There’s not a trust fund within miles of the author.
George – stick to reading and not commenting….not unless you want to bother gathering some facts.
Hey Mr. Soros, how are you? My name is Justin Lawlor and I am, in fact, the author of the article. I am a holder of B shares, which trade at levels nowhere near the $100,000 A shares.
Trust fund? Not quite. I come from a middle-class family and look forward to paying off my student loans upon graduation.
Furthermore, I thought it was neccessary to highlight the announcement of single largest acquisition within the more than 40 year history of what is Berkshire Hathaway. If you are a student and would like to sit down and talk finance or the markets at any point, please let me know.
Well, as long as we’re using fake names, I’ll pretend I’m Kenneth Griffin. Just because the kid has something intelligent to contribute doesn’t mean you have to hate because of your lack of intelligence. Being a contributor to the Vanguard, isn’t that his job? I’m not here to comment on Mr. Lawlor’s financial situation, because I really don’t know and couldn’t care less, but it was a well-written insightful article. Maybe you’re used to the format of a Sesame Street coloring book and you’re just enraged that this material was miles above your comprehension level? Keep your snide comments to yourself you little shit-stabber.
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