Tuesday, November 3, 2009

Warren Buffet's Berkshire Hathaway (BRK.A) to Acquire Burlington Northern (BNI) ; Split B (BRK.B) Shares 50 to 1

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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 that 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 demographic, yet 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 senses 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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