(The following column by Mitchell Schnurman appeared on the Fort Worth Star-Telegram website on November 6, 2009.)
FORT WORTH, Texas — It’s easy to understand why Warren Buffett wants Burlington Northern Santa Fe. It has a great brand name, a business that’s easy to understand, a record of profits in any economy, and a top-notch management team.
But why does the railroad want Buffett?
It’s almost sacrilegious to ask. As a businessman and investor, Buffett is so widely admired that U.S. presidents and the Bank of England call him for advice. With his credibility and common sense, he’s often the ethical compass for American business.
Companies regularly reach out to him, hoping that his publicly traded investment firm, Berkshire Hathaway, will snap them up. Under Buffett, they escape the never-ending demands of Wall Street. They get better access to capital, as well as Buffett’s sage advice — without the meddling that comes from most owners.
Sounds attractive, except that BNSF has done just fine on its own. It makes investments with 20-, 30-, even 40-year horizons, and has no problem raising money. It’s become a model of efficiency, doubling revenue and income this decade without raising its employee count.
And on the measure that matters most to shareholders, total return, BNSF has been leaving Berkshire in the dust.
In the past five years — even before Buffett offered a 31 percent premium that sent the railroad’s stock price soaring — BNSF’s return was five times greater than Berkshire’s. Take a longer view, 10 years, and the railroad’s total return topped 179 percent, compared with 55 percent for Berkshire.
That’s in the rearview mirror, though, and in the here and now, money talks.
Buffett’s bid price — $100 a share for a stock that was trading at $76 — creates what CEO Matt Rose calls a compelling value for shareholders, who must approve the sale. For the board, what sealed the deal is Buffett’s long-range vision and his pledge to let BNSF operate as it always has.
“We think we have an excellent home for the company,” Rose said in an interview last week. “The cultural fit just makes a lot of sense.”
The move has no strategic rationale. It doesn’t extend the railroad’s reach, diversify its revenue sources or create exceptional growth opportunities. But Rose said there was “no downside whatsoever” for employees, customers and the communities where BNSF operates.
Still, some uncertainty exists with any new owner, and most mergers and acquisitions have clear winners and losers. Burlington Northern had to lay off workers and close a headquarters after merging with the Santa Fe railroad. And the buyout of the former TXU Corp. has saddled the successor company with more debt than it can handle.
Those threats aren’t lurking here, but the deal introduces a different risk factor for the railroad: succession. Rose has been CEO since 2000 and added the chairman’s role in 2002, but he’s only 50, so the company doesn’t have immediate concerns about its leadership.
Buffett will turn 80 next year, and no public company is so completely identified with its top executive. After Buffett, what happens to Berkshire’s hands-off management style if his successor stumbles?
It’s not hard to imagine a parent company raiding the excess cash from a subsidiary, because it happens all the time in corporate America.
Rose said that BNSF looked closely into the succession question, because Buffett’s offer calls for a blend of cash and Berkshire stock. Independent advisers and BNSF’s chief financial officer met with Buffett to discuss his plans, and Rose says they were told that three candidates are in line, although no names were divulged — consistent with Buffett’s public pronouncements.
Rose, who said he has known Buffett for a decade, is comfortable with the setup.
“We believe, and I believe personally, that Berkshire Hathaway has forever been changed by Warren Buffett, and that it isn’t going to change again,” Rose said.
Robert Miles, who has written several books on Buffett, interviewed 20 CEOs whose companies were acquired by Berkshire.
“All of them, to a person, said they were absolutely delighted after the sale,” he said.
That reputation prompts companies to come to Buffett, not the other way around, so he usually has leverage. When Buffett talked about the BNSF bid last week, he gave the impression that it was an easy close, saying he met with Rose in Fort Worth and wrapped things up in about 15 minutes.
The quote doesn’t accurately capture things from Rose’s perspective. Buffett had visited BNSF headquarters the day before and met with the management team, as he has in years past. When he called Rose, their meeting lasted only 15 minutes, because Rose said there wasn’t anything complex to work out.
Buffett told him the price he was willing to pay. They discussed the blend of cash and stock to be used. And Rose asked about possible changes for the company and employees — a brief talking point, considering that Buffett said nothing would change.
After that, Rose said he would take the offer to his board. What followed, according to the CEO, was 10 days of almost around-the-clock assessments. Two investment banks and legal advisers were dispatched to evaluate the bid. There were a series of board meetings, calls to individual directors and analyses of various business plans.
The process concluded with a three-hour board meeting in Detroit.
“Anyone who thinks this was a done deal doesn’t understand the process,” Rose said.
There’s more to the back story. Buffett started buying BNSF shares in 2006. When he disclosed a 5 percent stake, the board was flattered. Then he got to 10 percent, 15 percent and finally topped 20 percent of outstanding shares.
By then, the board and management team had already considered the prospect of Buffett bidding for the entire company. They had weighed the pros and cons, and developed some business models, just in case.
Buffett told Rose that Berkshire would be perfectly happy as a 22 percent owner and would never make a hostile offer. After about 18 months of sitting pat, he made a bid that totals $34 billion, including the shares that Berkshire already holds.
After the board voted to accept, Rose congratulated his management team, because business’s biggest icon wanted to buy the company.
Then he said that BNSF was not going to change. The company might face less public scrutiny, but it couldn’t slack off. Operating results would be watched closely by none other than Buffett, and management pay would be based on the bottom line.
Despite Berkshire’s cash and credit capacity, BNSF would still sell its own bonds and service its debt.
“We still have to drive safety, operating income, return on invested capital — the exact same way that we do today,” Rose said. “That’s just the nature of the beast.”
BNSF may soon have a more benevolent master, but it’s still in the performance business.