Warren Buffett's $26 billion bet on Burlington Northern Santa Fe Corp. looks like the proverbial win-win for both BNSF and Berkshire Hathaway, Lawrence Kaufman writes in the cover story of Railway Age's December edition.
Kaufman writes that the transaction -- which is expected to close in the first quarter of 2010 -- has "shaken up the railroad universe" but generally has been well-received.
He then shows why the $100-a-share deal works for both sides, and why Buffett selected BNSF over Union Pacific, Norfolk Southern or CSX.
BNSF will benefit from being a private company, Kaufman writes. That will let the company ignore Wall Street's short-term fixations and make the capital expenditures needed for long-term success.
"As a private corporation, BNSF executives no longer will have to undergo quarterly investor calls and the need to defend decisions in the face of questioning that public-corporation executives endure," he writes.
Kaufman also notes that unlike hedge funds and private equity groups, Berkshire has no intent to pay itself fat dividends with the company's cash before putting it back on the public market. Buffett is in it for the long-term.
It's also a good deal for BNSF shareholders for the simple fact that nobody has come forward with a better offer, suggesting that $100 a share is a market price. Barron's and others have suggested that $100 may be a tad high.
But the price is worth it to Buffett for many reasons, Kaufman notes.
BNSF has what he calls an "impregnable franchise" and is the largest hauler of coal, grain and intermodal freight. Nobody will invest the billions required to compete with BNSF, which gives the company the moat, or competitive advantage, that Buffett looks for in all investments.
Further, Kaufman argues, Buffett probably sees that the federal government doesn't have the resources to repair the country's deteriorating infrastructure, meaning railroads that make the investments will gradually increase their traffic -- especially if the price of oil rises and the government imposes user fees on truckers and other highway motorists.
Kaufman also sheds some light on the question of why Buffett picked BNSF over other railroads, particularly Union Pacific, which is based in Omaha and covers much of the same geographic territory as BNSF.
Kaufman's best theory is that BNSF has made significant capital improvements over the past 15 years, whereas the railroad's competitors are still spending huge sums to upgrade their systems.
Though Buffett has pledged to continue investing in BNSF's capital needs, it would appear that fewer resources will be needed compared with other railroads. That would be attractive to someone like Buffett, who generally disdains investments that require massive capital spending without the requisite returns.
Click here to read the excellent article from Railway Age (the link takes you to the first page, and the article runs through page 22).
Kaufman writes that the transaction -- which is expected to close in the first quarter of 2010 -- has "shaken up the railroad universe" but generally has been well-received.
He then shows why the $100-a-share deal works for both sides, and why Buffett selected BNSF over Union Pacific, Norfolk Southern or CSX.
BNSF will benefit from being a private company, Kaufman writes. That will let the company ignore Wall Street's short-term fixations and make the capital expenditures needed for long-term success.
"As a private corporation, BNSF executives no longer will have to undergo quarterly investor calls and the need to defend decisions in the face of questioning that public-corporation executives endure," he writes.
Kaufman also notes that unlike hedge funds and private equity groups, Berkshire has no intent to pay itself fat dividends with the company's cash before putting it back on the public market. Buffett is in it for the long-term.
It's also a good deal for BNSF shareholders for the simple fact that nobody has come forward with a better offer, suggesting that $100 a share is a market price. Barron's and others have suggested that $100 may be a tad high.
But the price is worth it to Buffett for many reasons, Kaufman notes.
BNSF has what he calls an "impregnable franchise" and is the largest hauler of coal, grain and intermodal freight. Nobody will invest the billions required to compete with BNSF, which gives the company the moat, or competitive advantage, that Buffett looks for in all investments.
Further, Kaufman argues, Buffett probably sees that the federal government doesn't have the resources to repair the country's deteriorating infrastructure, meaning railroads that make the investments will gradually increase their traffic -- especially if the price of oil rises and the government imposes user fees on truckers and other highway motorists.
Kaufman also sheds some light on the question of why Buffett picked BNSF over other railroads, particularly Union Pacific, which is based in Omaha and covers much of the same geographic territory as BNSF.
Kaufman's best theory is that BNSF has made significant capital improvements over the past 15 years, whereas the railroad's competitors are still spending huge sums to upgrade their systems.
Though Buffett has pledged to continue investing in BNSF's capital needs, it would appear that fewer resources will be needed compared with other railroads. That would be attractive to someone like Buffett, who generally disdains investments that require massive capital spending without the requisite returns.
Click here to read the excellent article from Railway Age (the link takes you to the first page, and the article runs through page 22).
