UncleLongHair

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

> Just a few short months ago Buffet was all doom and gloom
> saying our economy was in financial chaos and we were on the
> road to ruin.

He wrote an op-ed piece in October 2008 telling everyone to buy American stocks, and he put his money where his mouth was. This turned out to be a mistake as he bought just before the worst of the disaster.

There are no quotes from Buffett about "doom and gloom and financial chaos". You are making that up.

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

I agree that the deal is out of character. Buffett broke his 3 cardinal rules: don't issue stock, don't issue debt, and don't split the stock. He broke all 3 rules in the same deal.

He obviously stretched into the acquisition, and paid a pretty price as well. This is a big departure from his previous deals in almost every way.

However, I don't think this is simply hubris or some unfulfilled childish infatuation with trains. Berkshire has for a long time needed major operating businesses to go with the insurance and investments, for numerous reasons. One is simply to maximize the earnings potential of the company, but I think this deal goes beyond that.

I think that succession and hence Berkshire's long-term health factored into this deal in a few ways. I have long been of the opinion that it would be a big mistake for Buffett to leave Berkshire to his successor with billions of cash requiring investment. A single bad investment made by his successor could undo decades of careful building. He also does not want to give his successor a bunch of hard problems to address such as betting the company on whether or not to provide hurricane reinsurance. Finally, he probably has quite a short list of possible successors, and knows their skill sets.

I think the Burlington deal addresses all of these questions. It transforms Berkshire into a huge operating company full of businesses that are generally easy to run. It provides an enormous sponge to absorb Berkshire's cash -- Burlington requires billions of cap ex every year for maintenance and growth. Burlington is also related to Bekrshire's energy businesses, and I suspect that Buffett's successor will come from there (i.e. David Sokol).

So with a single deal, Buffett has transformed Berkshire into a more secure, easier to run company, with indefatigable earnings power. The opportunity to do this during a market trough, I believe, explains Buffett's willingness to stretch into it.

Blasphemy: Burlington Northern Shouldn't Be Held

The crux of your article seems to be that BNI will revert to a former valuation multiples. I think you should spend some time examining how BNI's business is different today than it was 5 or 10 years ago. Companies that go through a positive business transformation typically experience multiple expansion, not multiple contraction. There are very good reasons why BNI's business is stronger today than 10 years ago, which will result in better performance as measured by things like ROIC, ROE, etc. which will lead to higher multiples to book, sales, and earnings.