Financial News Beat

Warren Buffett was born with investing in his blood. According to the numerous biographical sketches written on the “Seer of Omaha,” he displayed an amazing aptitude for money and business at an early age and it has served him well in all the investments he has made through the years. He has come a long way from his early years when he  purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris, to being one of the richest man in the world. He built Berkshire Hathaway Inc. (BRK-A) (BRK-B) into a behemoth by taking calculated risks, as evidenced from his latest and largest acquisition ever, 131 year-old Burlington Northern Santa Fe Corporation (BNI) for $34 billion. The company will pay roughly $26 billion in cash and stock for the 77.4 percent of the company it doesn’t already own. The acquisition sent ripples through the market and reignited investor interest in rail and transportation stocks.

As part of the bid, Mr. Buffett will split Berkshire’s class B shares 50-for-1 to pay Burlington Northern shareholders, essentially breaking his rule of never splitting Berkshire’s stock. The split increases the total number of class B shares while avoiding fractional stock ownership for Burlington Northern shareholders.

In a 2007 letter, Warren Buffett stated that he preferred to seek out value in “companies that have a business we understand; favorable long-term economics; able and trustworthy management and a sensible price tag.” It would follow that Mr. Buffett would never have invested in the network of railways that comprise BNSF in the 19th century, when the United States became the world’s first emerging market. It was then a classic high-growth, high-risk industry where fortunes were won and lost. Logically speaking, U.S. railway operators, such as  have consolidated over more than a century, have grown more efficient and no longer face the possibility of another company laying a rival track, that Mr. Buffett has made such a big bet on the sector with his acquisition.

Buying a railroad is a sound way to gain cash dividends and provides broad exposure to companies that need coal and freight, though the strength and prospects of the U.S. economy remain challenging. Warren Buffett has, in fact, seen into the future because railroads are very fuel-efficient, pollutes the air less than trucks and stand to benefit from the “green” wave now sweeping the country. According to Mr. Buffett, one train can supplant about 280 trucks. This should also serve  GATX, CSX and Union  Pacific (UNP) well. Quite simply put, Buffett’s bet on Burlington is a long-term play on economic recovery and quite possibly, global warming.  The purchase includes a nice potential option in the form of 32,000 miles of rights-of-way that could eventually form the backbone of a nationwide broadband.

The balance sheet at Berkshire Hathaway shows a tidy sum of $20 billion in cash left to spend. So, where will Buffett set his sights next? He certainly won’t make a big acquisition such as Burlington Northern, but he could certainly increase his stake in existing holdings such as Kraft Foods (KFT) or purchase a sizable stake in companies such as Transocean Ltd. (RIG), Cisco Systems Inc. (CSCO) and TD Ameritrade (AMTD), for example.

The purchase of BNSF will most likely conclude his search for an “elephant” acquisition, which he first described in one of his famed letters to Berkshire investors two years ago. His last major deal was in late 2007, when he agreed to buy a majority stake in Marmon Holdings, the conglomerate controlled by the Pritzker family. It will be very interesting to see where Buffett will make waves next.