Burlington Northern: Warren Wants It All

A couple of interesting acquisitions in the past 24 hours; late yesterday a bid for Black & Decker (BDK) by Stanley Works (SWK) - apparently finalizing a 28 year courtship!

• Stanley agreed to buy Black & Decker for about $3.5 billion in an all-stock transaction, creating a global tool maker worth about $8.4 billion. The combined business, to be called Stanley Black & Decker, will own many names familiar to do-it-yourselfers, including the companies’ namesake lines, Stanley’s FatMax and Bostitch and Black & Decker’s DeWalt and Porter-Cable offerings. The two companies have little overlap in their products, with Stanley best known for hand tools and construction equipment and Black & Decker for power tools.

Unlike most deals nowadays which seem to be done for no other reason than the CEO can say "I added value!" to try to justify his/her pay, this one makes a lot of sense due to similar customer demographics, yet there is little overlap in product line. However, per the usual merger metrics, some job losses are certain to follow to offset "redundancy".

• Executives said most of the savings will come from reducing corporate overhead and consolidating business units and manufacturing, distribution and purchasing. Black & Decker has 22,100 workers and Stanley has 18,200 employees.
• The deal also represents a coming wave of consolidation in the industrial sector as companies try to cut additional costs as revenue remains flat. Both Stanley and Black & Decker have been hurt by the real estate crash, which has slowed new construction and spending on new equipment.

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More interesting was Warren Buffet's outright acquisition of Burlington Northern (BNI). Berkshire Hathaway already owned a good piece of the firm, but he wants the whole thing. (both boards appear to have already approved the deal) Makes a lot of sense, since these railroads are mini-oligarchs of their own; of course Warren wraps himself in the US flag in his public reasoning for the purchase... it has nothing to do with almost no competition and massive pricing power. [Sep 3, 2009: Fortune - China's Amazing New Bullet Train, and America's Amazing Railroad Oligarchs] Also fascinating is the decision to split the B shares of Berkshire 50 to 1.

• Warren Buffett's Berkshire Hathaway Inc (NYSE:BRK-A - News; NYSE:BRK-B - News) said it agreed to buy railroad Burlington Northern Santa Fe Corp (NYSE:BNI - News) in Buffett's biggest acquisition ever.
• Berkshire says transaction is largest in its history and expects the deal to occur in the first quarter of 2010.
• In a statement, Buffett said railroads are key for the United States' future growth, and will only grow when the nation grows. "...(I)t's an all-in wager on the economic future of the United States," Buffett said. "I love these bets."
• Berkshire Hathaway Inc. already owns a stake of about 22 percent in Burlington Northern, and says it will pay $100 a share for the rest of the company. That is a 32 percent premium over Burlington's closing price on Monday

As for the stock split, which Buffet always seemed too be against in the past...it appears to be due to the BNI acquisition.

• Additionally, the Berkshire board approved 50-for-1 split of its B shares.
• “I’m not big on stock splits, but by having this split, it enables anybody as little as one share of BNSF to opt for the tax-free exchange,” said Buffett. “So the small shareholder can have the exactly the same availability that otherwise would only have been available to a big shareholder.”

[May 3, 2009: Berkshire Hathaway's Charlie Munger Says "Venal" Banks May Avoid Needed Reform]

[Feb 28, 2009: Warren Buffet's Berkshire Hathaway Letter 2008 Investor Letter]

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Comments

[Mad Hedge F...:]

sui You’ve got to hand it to Warren Buffett, who never does anything half heartedly. The stunning news that he is paying $44 billion for the 73.4% of Burlington Northern Sante Fe (BNI) he doesn’t already own, a 30% premium, had punch drunk traders picking themselves off of the floor. The other rails rocketed, like Union Pacific (UNP), CSX (CSX), and Kansas City Southern (KCSR). The deal is the Oracle of Omaha’s largest in his career, and took the BNI board all of 15 minutes to approve. For me this deal speaks volumes about the long term trends in the US economy as seen by its greatest investor. It screams Commodities! Commodities! Commodities! Rails can only prosper moving bulk freight from the heartland to ports on the three coasts, which foreigners are buying in ever larger quantities at ever higher prices. It also says the coal industry isn’t going anywhere soon, as it accounts for 70% of all rail traffic. Buffet let loose of some fascinating statistics about the enormous productivity increases the industry has accomplished. In the last 25 years, it cut employment from 500,000 to 175,000, while increasing freight by 60% and reducing track by 40%, and now accounts for 40% of the total goods moved in the country. Railroads are the greenest transportation out there, a ton of freight requiring only a gallon of fuel to move 470 miles. When I was growing up, my big goal in life was to become a train engineer. Maybe it’s time for me to revisit that aspiration. And I promise not to text while driving!

Nov 03 07:51 PM

[Shocksink:]

Buffet is telling us that the price of gas will soar.

Nov 04 05:53 AM