The real seduction of Warren Buffett

Posted by Fred Frailey
on Wednesday, December 30, 2009

In an essay of almost this same name two months ago, I suggested the scenario that led to the acquisition by Warren Buffett’s Berkshire Hathaway of the Burlington Northern Santa Fe stock it did not already own.  Now comes the filing of proxy documents to the Securities and Exchange Commission by BNSF, and what really happened becomes clear. The proxy material contains a chronology of events leading to the merger agreement. But it also leaves out a couple of important events. So I will retell the story, this time without any fanciful imaginings on my part. By the way, I was closer to the mark than I thought at the time.
 
Thursday, Oct. 22. Buffett meets his fellow CEO, BNSF’s Matt Rose, in Fort Worth. The meeting was arranged earlier, and Buffett is in town because his board of directors begins a three-day meeting there that day. Nothing is said about Berkshire’s increasing its 23 percent ownership of the railroad. (Not mentioned in the proxy statement: Later that same day, after the stock market closes, BNSF reports that third-quarter earnings were off 30 percent from a year earlier, and Rose gives a not-so-peachy outlook for the rest of the year.)
 
Friday, Oct. 23. (Not in the proxy: The stock market is less than impressed with BNSF’s earnings report of Thursday afternoon. BNSF stock plunges $5.50 a share, to $79. Previous filings by Berkshire revealed that it almost never bought BNSF stock when the price was $80 or more. ) Buffett’s assistant calls Rose and asks if the two men could meet again that evening.
 
Friday night, Oct. 23. Buffett tells Rose that if the BNSF board were receptive, Berkshire would offer $100 for the other 77 percent of the railroad’s shares. The payout would be 60 percent cash and 40 percent Berkshire Hathaway stock. Berkshire would split its Class B shares to facilitate the stock payout and obtain $8 billion in outside financing to enable the cash payout. Buffett also tells Rose that $100 a share is the most his company could afford to offer BNSF shareholders. (Not in the proxy: Two things seem obvious. First, Buffett didn’t start thinking of the buyout that day, as BNSF’s stock price plummeted. His offer was too detailed and too well thought out to be spur-of-the-moment. Second, he surely regarded the unexpected drop in BNSF’s price as a gift from above; with the stock below $80, Berkshire could now afford to offer BNSF shareholders a handsome premium to sell their holdings.)
 
Saturday, Oct. 24. Rose calls his lead director, Edward Whitacre Jr., AT&T’s former CEO, with the news. Wheels begin to turn.
 
Monday, Oct. 26. BNSF’s board holds a telephone meeting. Investment advisors have been lined up, some members of senior management are in the loop, and another telephone meeting is scheduled for that Wednesday.
 
Tuesday, Oct. 27. Rose phones Buffett and says BNSF’s board is “still considering the matter.” The two men discuss various provisions of the offer.
 
Wednesday, Oct. 28. Among other things, BNSF’s board discusses the $100 per share that its shareholders would get in the proposed transaction versus what they might ultimately obtain if BNSF remained a publicly owned company indefinitely. The board authorizes Rose to begin formal discussions with Berkshire Hathaway and to seek a higher price. (Not in the proxy: Wall Street still thinks BNSF stinks. The share price, which was $86 scarcely a week earlier, is drifting now toward $75. At $75, a $100-per-share takeover offer represents a fat 33 percent premium.)
 
Later that same day, Rose phones Buffett. He asks Buffett to raise the bid above $100 a share. Buffett replies that $100 is at “the very top of the range” that he is willing to pay.  But he repeats something said twice before: that Berkshire would agree to a “collar” on the stock portion of the deal, so that if Berkshire’s share price falls more than nominally before the buyout is consummated early in 2010, BNSF shareholders would be made whole.
 
Thursday, Oct. 29. Berkshire’s outside law firm circulates a draft of the merger agreement.
 
Friday, Oct. 30. Buffett sits down with BNSF’s financial advisors and some of its senior management and discusses various matters concerning Berkshire Hathaway, including the projections by one securities analyst of Berkshire’s future earnings and the consensus estimates of all analysts who cover the affairs of Buffett’s company.
 
Monday, Nov. 2. The BNSF board convenes secretly in Detroit that afternoon. For the second time, it considers whether to contact other potential acquirers of the railroad. Its financial advisors (Goldman Sachs and Evercore) say other suitors are unlikely to appear. The proposed merger agreement does give BNSF the right to entertain other offers. Ultimately, the board approves the buyout as being in the best interest of shareholders. Berkshire’s board also meets, by telephone, and approves the agreement, plus a 50-for-1 split of its Class B shares, then trading at about $3,200 each.
 
Tuesday, Nov. 3. Bright and early, before the stock market opens, the two companies announce the transaction.
 
My recital of events is a highly condensed version of that contained in the proxy document. If you ever wanted to know how a financial deal is cooked up, now’s your chance to learn. You can read it all at http://www.sec.gov/Archives/edgar/data/934612/000119312509259413/ddefm14a.htm#rom81940_49  – Fred W. Frailey

 

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