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Buffett Buys Railroad Giant for $26 Billion

Warren Buffett is again putting his massive stash of cash to work and making a big long-term bet on the still-struggling U.S. economy.

On Tuesday, the head of Berkshire Hathaway announced his biggest deal yet: a $26.3 billion cash-and-stock acquisition of Burlington Northern Santa Fe that values the railroad giant at $34 billion.

It was classic Buffett: buying an easy-to-understand company with proven management and at a price that will likely generate long-term gains, says Lawrence Cunningham, author of "How to Think Like Benjamin Graham and Invest Like Warren Buffett."

Buffett already had a 22.6% Burlington Northern stake and will pay $100 a share for the rest, a 31.5% premium above Monday's close.

Buffett calls the deal an "all-in wager" on the USA's economic future. "We will come out of the downturn, I just don't know when," Buffett told USA TODAY. "My time horizon is we will hold (the railroad) forever." While Buffett doesn't expect spectacular growth from the rail business, he says trains that transport stuff such as corn, cars and coal will deliver "steady and certain growth over the decade."

The deal marked Buffett's latest vote of confidence in the USA since the financial crisis erupted last year. In October 2008, in the depth of the financial implosion, he wrote an op-ed under the headline: "Buy American. I Am." That fall, he also made huge investments in Goldman Sachs and General Electric when raising capital was nearly impossible.

Buffett's words carry huge weight. "He has a little bit of a bully pulpit and is letting everyone know he believes the economy is recovering," Cunningham says.

In doing his biggest deal ever, Buffett sends a clear message that he thinks America's best days are ahead. "He is putting his money where his mouth is," says Jeff Matthews, a hedge fund manager at Ram Partners.

The rail investment depends on a recovery that some economists say will be spotty at best. The deal worries Matthews: "It makes Berkshire more dependent on the health of the economy than the stock picks of Warren Buffett."

Buffett says the rail business is a cost-effective and environmentally friendly way to move goods. "The rail business is actually in tune with the future," Buffett says.

"We are not doing anything risky," he says. "I am 79, and I don't want to 'go back to Go,' " he adds, referring to the financial setback in the board game Monopoly.

While Buffett is not a fan of stock splits, he says the 50-to-1 split of Berkshire's class B shares that is part of his deal proposal will make it easier for the railroad's stockholders who don't want cash to swap their shares for Berkshire stock. The lower cost of the shares will also make it easier for small investors who want to invest with Buffett to do so.

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