
Berkshire Hathaway buys Burlington Northern Santa Fe (a U.S. railroad) for $44B - davi
http://dealbook.blogs.nytimes.com/2009/11/03/berkshire-to-buy-rest-of-burlington-northern-for-44-billion/
======
johnohara
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?)

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.

Large-scale packets on the rails, small-scale packets in the pipe.

Berkshire Hathaway doesn't just invest in well-run companies. It invests
heavily in the management of well-run companies.

~~~
hop
Buffett's bet is not on management, its on the dollar losing value b/c its
being printed like mad to meet gov't obligations and it losing its place as
the reserve currency.

Railroads can haul a ton of goods about 400 miles with one gallon of diesel.
When the dollar devalues and gas goes to $5-$10+ per gallon, we will be
reminded once again why he is the Oracle of Omaha.

Buffett has talked about coming inflation in his last two or three annual
letters to shareholders. When we start having 10% annual inflation, the p/e on
this deal will get better and better.

"The Green Back Effect" by Warren Buffett, NYT, 8/18/09 -
[http://www.google.com/search?hl=en&rlz=1C1GGLS_enUS346US...](http://www.google.com/search?hl=en&rlz=1C1GGLS_enUS346US..).
(sorry for the indirect Google link, NYT redirects direct links to a tease
subscriber only page)

~~~
steveplace
I have to disagree, Buffett doesn't trade macro--he trades value. The
(alleged) dollar devaluation may have been included in his analysis, but
that's not the underlying rationale behind the trade.

~~~
hop
At the most recent annual shareholders meeting:

Question: _What is your latest outlook on the dollar given what's been thrown
up in the air in the last 6 months?_

Buffett: _It's pretty unpredictable. I guarantee you the dollar will buy less
10-20 years from now. But we are doing things that will hurt the purchasing
power of the dollar. On the other hand the same thing is happening in
different countries around the world. The British will run a deficit of 12 and
a fraction percent of GDP. Even the Germans will run a deficit of 6 and a
fraction GDP. You've got governments around the world all electing to run very
material deficits. Electiing to do that to offset the contraction demand. How
that plays out in relative exchange rates - I can't tell you. In terms of
currency's purchasing power in the future - it's going to cause units of
currency to buy a lot less.That isn't gonna happen in the next year or two.
Doesn't mean markets won't start anticipating it at some point. We are doing
things that we havne't seen in the past. And policy makers do not know the
outcome and I don't know the outcome. You do know it will have consequences
and you can bet on inflation._

Munger: _I remember the 2 cent first-class stamp and the 5 cent hamburger. In
my life I think I've had the most privileged era to live. The trick is to
avoid runaway inflation._

[<http://j.mp/3z6gpr>]

~~~
sethg
As I understand it, most economists (certainly, most economists whose opinions
matter to central bankers) believe that a _small_ rate of inflation, perhaps
1-2% annually, is a Good Thing, since it encourages savers to invest in
productive companies rather than just stuffing greenbacks under their
mattresses.

So "I guarantee you the dollar will buy less 10-20 years from now" is a pretty
safe bet, regardless of the general political and economic situation.

------
jakarta
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.:

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.

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.

“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.”

“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.’”

~~~
byrneseyeview
He's said that he'll do it if he gets equivalent value for the money. I
believe he bought either Netjets or Flight Safety for stock, too.

~~~
jakarta
you're right, it was NetJets in 1998
<http://www.berkshirehathaway.com/news/jul2398.html>

~~~
byrneseyeview
Also General Re in the same year.

------
edw519
_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._

Hell, it takes us longer to pick a font.

~~~
jonmc12
Buffett himself keeps no firm schedule - he keeps his time available
specifically so that he jump on deals. His organization is organized for
jumping on opportunities once he decides they are a good deal.

~~~
zargon
That statenent is about the Burlington Northern board making a decision in 15
minutes, not Buffett...

------
davi
_Buffett said ... that railroad operators cannot do well unless American
businesses are producing goods and customers are buying them._

 _"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 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.

~~~
catzaa
Long distance trucking is sure to loose. If the economy recovers, the oil
price is sure to "recover".

~~~
hyperbovine
Thank god trains don't run on oil.

~~~
mahmud
Here is a good article on the fuel efficiency of trains:

[http://www.factcheck.org/askfactcheck/can_a_freight_train_re...](http://www.factcheck.org/askfactcheck/can_a_freight_train_really_move_a.html)

~~~
tocomment
But don't trains run on electricity in a lot of places? So doesn't that make a
comparison to diesel truck efficiency bogus? It's like that 400 mpg plug in
hybrid we heard about a while back.

~~~
raquo
It's not the engine that makes difference. Internal combustion engines don't
vary by orders of magnitude in efficiency. It's less friction, higher scale
and constant speed that make trains more efficient. Diesel or electrical, does
not matter. They spend less _energy_ per ton per mile.

// I'm not entirely sure that what I said is 100% truth, so take it with a
grain of salt.

~~~
tocomment
There should be a lot of things that make trains more efficient. Here are some
of my guesses:

Hard tracks and wheels = less rolling friction?

Less air resistance since one leading car breaks the air for 100+ other cars?

Engine can run at a constant speed

Less changes in speed

Less starts and stops

Slower acceleration

~~~
potatolicious
Dramatically less labor per ton hauled also - how many employees are on a
freight train pulling 100 cars? vs. how many drivers in 100 semis?

------
jakarta
my guess is it comes down to two things:

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

2\. Railroads > Trucking when oil shoots up. Could be his view that this is
likely.

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.

~~~
DrJokepu
Could you explain the "Railroads > Trucking when oil shoots up" in more
detail?

I would assume that the fuel costs of diesel locomotives are just as tied to
oil prices than fuel costs of trucks. The operating costs of electric
locomotives would get equally more expensive as well as electricity prices are
not independent of oil prices (and electricity is always more expensive than
oil).

~~~
eru
> as electricity prices are not independent of oil prices (and electricity is
> always more expensive than oil).

Oil isn't used to generate electricity. At least not much. Look for coal,
nuclear power, some natural gas.

In general electricity is much cheaper than oil based forms of energy. The
reason why cars run on gasoline and Diesel is, that those have a much higher
energy density than current batteries.

~~~
DrJokepu
Electricity is a lot more expensive than oil based energy.

In 2009, the industrial price of electricity in California is around $0.10 /
kWh. That's $0.028 / MJ. The current price of diesel oil is $2.801 / gallon,
which is $0.616 / litre which is $0.016 /MJ (assuming 38.6 MJ/l as the heat of
combustion of diesel oil).

So diesel oil is $0.016 / MJ while electricity is $0.028. As you can see,
electricity is a _lot_ more expensive in ideal circumstances (all the energy
is converted to useful work). Now obviously, not all of the heat in the
combustion engine can be converted to mechanical energy so there's quite a
loss there while electrical engines have very good energy efficieny ratios,
but still, oil is a lot cheaper than electricity, and that is the main reason
it is used as the primary energy source.

EDIT: I have made a huge (100x) mistake, thanks for eru for spotting it, it's
corrected now. Still, my point stands.

~~~
eru
Thanks for the numbers. I guess I will have to run some numbers on my own, to
see if that turn out.

In principal electricity should be at least as cheap as Diesel in terms of
usable energy --- because if it was more expensive you could use Diesel to
generate electricity (arbitrage opportunity).

Also the efficency of moving Diesel engines is not that good. Less than 30% or
so. And they can't get much better without raising their working temperature,
because the theoretic maximum (Carnot Engine) isn't that much higher. Moving
engines have to be quiet compact --- on trains less so than in cars. The big
stationary engines in the power plants do not have to conform to this
limitation. (But there is some loss in transmiting the electrity through the
power lines, too.)

I'll come back with some numbers soon.

Edit: I don't know why someone downvoted you. If your numbers are wrong, they
should they so. If not, there's no reason to downvote.

~~~
eru
"Electrification has a high initial capital cost but the operating costs are
lower."

"Even in sparsely populated large countries (Finland, Sweden) electrification
has proven to be more economical than diesels."

(from <http://en.wikipedia.org/wiki/Dieselization>)

10 $ per kW/h sounds very high. Are you sure it's not 0.10 $ per kW/h?

------
yread
_As part of the deal, Berkshire will split its class B shares 50-to-1 to help
pay for the acquisition._

Wow Buffett splitting stock?!

~~~
tocomment
How does splitting shares help pay for a deal?

~~~
chrisa
The split won't actually raise capital for the deal, but will help to payoff
shareholders of the railroad. According to
[http://www.marketwatch.com/story/berkshire-
approves-50-for-1...](http://www.marketwatch.com/story/berkshire-
approves-50-for-1-class-b-stock-split-2009-11-03) the split is to "accommodate
holders of smaller amounts of BNSF shares who opt for a share exchange rather
than a cash payment."

So, some shareholders of Burlington will opt for shares instead of cash, and
since you can’t own a fraction of a share, they have to split the stock to
accommodate them.

------
emsysman
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.

~~~
forensic
rail roads are obsolete as public transport. stuff like this is much superior:

<http://www.skytran.net/phpsite/home/Home%20Intro.php?bg=neg>

~~~
potatolicious
Yeahhhhh, no. We've been talking about personal pod-based mass transit for
decades and it has yet to materialize, even without the sci-fi billion-dollar
mag-lev thing.

Rail will be the de facto standard for mass transit for years to come. Why?
Because it goes _really, really_ fast, we have had literally hundreds of years
of experience running trains of all sorts, and experience, know-how, and
resources are available cheaply.

Honestly, I don't even think mag-lev will take over as the primary form of
rail transport. It's still too expensive, and the gains not sufficient to
justify the additional cost. We have high speed trains running impossibly fast
on existing rail infrastructure - unless you can double that speed and break
the sound barrier or something, there's no incentive to spend ludicrous cash
on that sort of system. Even Shanghai, a city that seemingly has unlimited
funds for infrastructure, has shied away from mag-lev after building the
airport line.

------
protez
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.

~~~
iron_ball
Particularly makes sense given Buffett's own public worries about a poisoned
dollar.

------
Anon84
Maybe this will the beginning of a new era of investment in long distance
freight.

(A renewed interest in public transport would be great as well)

~~~
thingie
BNSF is a freight railroad network, unsuitable for mass public rail transit.
Buffet is getting into the freight service business, not passenger traffic.

~~~
Anon84
I know. I'm hoping the interest will spill over to passenger traffic, like we
are starting to see now with the European high speed train network.

~~~
thingie
Is there any surprising recent development concerning European HSRs? There are
new lines opening in Spain, France, Germany, lots of ideas in many other
countries (UK), but it isn't much faster or bigger than last few decades.
There are still more new highways, and even though railroad passengers numbers
(HSR) are rising, still only quite slowly.

~~~
adw
New lines in the UK, too: High Speed 1 (the Channel Tunnel Rail Link) has been
up and running for a bit, and the discussions about a high-speed replacement
for the Midland Main Line are going.

------
jagjit
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.

------
markberg
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?

------
bh23ha
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.

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.

------
steveplace
Black and Decker got bought out today too. Those are huge deals.

------
johnohara
It's gonna be tough getting by his hotels on Park Place.

~~~
DanielBMarkham
I really, really hate the fact that I upvoted you.

Seriously. I was going to make the same joke, but I was also going to follow
it up with something more pertinent, like the fact that rails have the best
cost-per-ton-mile or that railroads are both a monopoly and in limited supply
(you can't just make more of them)

So -- love the joke. But everybody can't just shoot out one-liners like that,
myself included. Next time add something of value to the reader besides a
joke. We don't want this place turning into reddit.

~~~
johnohara
Read my other post Dan.

I had an office two blocks away from the BNSF line in Chicago when they were
laying the fiber from downtown to the central office in Hinsdale. I went out
and talked to the guys boring underground (TX fiber-slingers wearing metal-
tipped boots and hats -- I'm sure people here have met them).

Berkshire made a good purchase.

~~~
DanielBMarkham
Great post!

[next time] Could you just combine the two please so that I can enjoy voting
up both the great one-liner _and_ the pithy insight. I love humor, and I have
a soft spot for great one-liners. My point is that others are the same way,
and sometimes the jokes get more karma than the meaty content. That's not good
for the board over the long term.

Whenever I find myself wanting to throw out a one-liner, I make myself stop
and find something useful for others (or usually I don't post at all)

Lame attempt at this: <http://news.ycombinator.com/item?id=919298>

Apologies for the meta-discussion. This is yet another of my bad habits...

------
mrduncan
A pet peeve of mine but Buffett didn't purchase the railroad - his company
Berkshire Hathaway did.

~~~
tseabrooks
I think you are being a bit pedantic here. While he may not have made the
purchase with his own finances he is the one making the decision and coming up
with the strategy... and THAT is what people are interested in. People will be
interested in this because of this implies about Buffet's thoughts on the
future economic situation in America. Whose money he uses is of little
interest or importance.

~~~
mrduncan
Maybe so. I agree with what you're saying, but even Buffet doesn't work alone,
from what I understand Charlie Munger is pretty influential in most of the
decisions as well.

~~~
eru
That's a point. Please keep in mind that Buffet has a large share of his
wealth tied up in Berkshire shares, so he's risking his own money.

------
jussij
Why didn't he just by Twitter for $1B and save himself $43B?

[http://www.reuters.com/article/smallBusinessNews/idUSN161636...](http://www.reuters.com/article/smallBusinessNews/idUSN1616362920090917)

Does he know something we don't?

------
MikeCapone
There's certainly a green angle to this story:

[http://www.treehugger.com/files/2009/11/warren-buffet-
buys-b...](http://www.treehugger.com/files/2009/11/warren-buffet-buys-bnsf-
railway-trains-berkshire.php)

------
hooande
"I like cash," Mr. Buffett said.

------
MikeCapone
The story says 34 billion, not 44.

~~~
Retric
_the 77.4 percent of Burlington Northern Santa Fe it did not already own for
$34 billion in cash and stock, in the largest deal in Berkshire history._

But wait, they also assumed 10 billion in debt. So they just "spent" 34
billion buying sock + 10 billion debts to get the company.

PS: I don't know when BH got their initial stake, but they could have paid
something like (34 / .774) = ~43.9 billion to get the company. Assuming the
company was profitable and paying down the debt you can somewhat ignore it.

~~~
MikeCapone
That's correct. thank you.

------
jwr
Ok, cool, but how is this relevant to us, hackers? How is this Hacker News?

~~~
ableal
What are the consequences of shifting a large number of megadollars and
megatons to a different land freight system ?

There may be some of interest to you. If not, well, someone else will probably
figure out what they can do ...

~~~
akd
> megadollars

actually, gigadollars...

