BNSF has the best end-to-end rail network in the country. They spent big $$ improving infrastructure when others like the CSX were dawdling with their logistical systems (does anyone remember the backlogs and delays in TX and AL during the early 2000's that required federal intervention?)<p>The hidden gem in this deal is the investment BNSF made in laying 24cnt fiber next to their track in continuous 4" pvc. I've always felt the decision to do that was a reflection on just how well-run the BN was as a company.<p>Large-scale packets on the rails, small-scale packets in the pipe.<p>Berkshire Hathaway doesn't just invest in well-run companies. It invests heavily in the management of well-run companies.
The really interesting thing here is that Buffett is set to use Berkshire shares for the acquisition. I can’t remember the last time that he did this, I know he really regretted it with Dexter Shoe Co.:<p>In 1993, Berkshire paid $433 million for the Maine-based company. Rather than use cash, Buffett used Berkshire Class A stock to fund the purchase. That Berkshire stock is worth eight times more now, giving the Omaha, Nebraska-based insurance and investment company a $216 billion market value.<p>Dexter didn’t make it that long. It ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit.<p>“What I had assessed as durable competitive advantage vanished within a few years,” Buffett wrote on Friday. “By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business — one now valued at $220 billion — to buy a worthless business.”<p>“To date, Dexter is the worst deal that I’ve made,” Buffett went on. “But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.’”
<i>Mr. Buffett said that the deal came together quickly...Mr. Rose took the proposal to his board - and got an answer in about 15 minutes.</i><p>Hell, it takes us longer to pick a font.
<i>Buffett said ... that railroad operators cannot do well unless American businesses are producing goods and customers are buying them.</i><p><i>"It’s an all-in wager on the economic future of the United States," he said in a written statement. "I love these bets."</i><p>I wonder if it's also a long-term bet about the future cost effectiveness of rail vs. long-haul trucking for shipping goods to U.S. consumers.
my guess is it comes down to two things:<p>1. The capital expenditures of railroad companies are changing. Most of them have pretty much laid track everywhere needed. If expansion isn't necessary, CapEx will go to maintenance for the most part, this means a ton in "owners earnings" to go up to BRK-Parent<p>2. Railroads > Trucking when oil shoots up. Could be his view that this is likely.<p>For bonus, I know there is a lot of talk about BNI having a competitive advantage at getting access to shipping Chinese goods because of their west-coast track network, apparently they are better developed than others for this.
The way cars have monopolised USA and lack of poor public transport infrastructure might provide a huge opportunity for rail road companies. I really hope to see cheap public transport system in USA. Also given lot of public awareness about global warming and reducing oil consumption may be added incentive.
It seems to be a flight from cash, in the prospect of Obama's bailouts and Fed's endless dollar printing. A railroad business makes perfect sense when the incoming inflation will give the definite advantage to the low-cost transportation over any other alternatives.
Very interesting to note how a top value investor differs from VCs.
When Buffet goes all-in for future of American economy, he goes for a company/industry which has been around for a century or more with stable cash flows. In effect though, future of American economy wont matter much to him unless the economy goes into a severe long depression - which he is betting against.
When VCs go all-in for future of something - they go for companies/industries with no history of profits. That is why they have to use crutches of hype and ipos using the hype. I think the hype machinery is working right now to create value - out of thin air - in clean/green energy tech.
I am not questioning the utility of VC - just questioning its characterization as investment. I think it is just speculation. Calculated at best, done by the smartest people. But still speculation. Just like most of Wall Street.
Is there a measure of the private gain from public support for rail vs truck? BNSF maintains its rails with less taxpayer support than the truck companies get for highways, right?
Interesting investment, if the US economy is indeed undergoing a restructuring with the dollar declining and exports replacing imports, then this should create a lot of business for the rail-roads.<p>However, while the transformation away from import driven consumerism, to manufacturing led exports may sound like things are great, they are in fact getting slightly worse. Because it is driven by a reduction in American global purchasing power, this makes imports, oil among them, more expensive and domestic products more price competitive.
Why didn't he just by Twitter for $1B and save himself $43B?<p><a href="http://www.reuters.com/article/smallBusinessNews/idUSN1616362920090917" rel="nofollow">http://www.reuters.com/article/smallBusinessNews/idUSN161636...</a><p>Does he know something we don't?
There's certainly a green angle to this story:<p><a href="http://www.treehugger.com/files/2009/11/warren-buffet-buys-bnsf-railway-trains-berkshire.php" rel="nofollow">http://www.treehugger.com/files/2009/11/warren-buffet-buys-b...</a>