Buffett adds rails to his investment 'masterpiece'

Billionaire Warren Buffett likes to compare his company to a masterpiece that he's been painting for nearly five decades, and the deal he announced Tuesday will permanently alter the color of Berkshire Hathaway Inc.'s portrait.

The 79-year-old investor plans to add a brilliant orange section to the painting for the brightly colored locomotives of Burlington Northern Santa Fe Corp. that Berkshire will acquire for $34 billion in cash and stock. It will be the biggest deal yet in a career of big deals.

Buffett described it as an "all-in wager on the economic future of the United States," but it's also transformative for his Omaha-based company. It will make freight railroads Berkshire's third-largest industry after insurance and utilities.

"I think it's classic Buffett," said Andy Kilpatrick, the stockbroker-author who wrote "Of Permanent Value: The Story of Warren Buffett."

Buffet's Berkshire prefers to buy companies instead of just investing in stocks, and Buffett has simple standards for what he looks for in an investment: easy-to-understand large companies with a strong competitive advantage that generate cash and above-average returns on capital.

Just a few weeks into the stock market collapse that began in September, 2008, Buffett wrote an opinion column for the New York Times headlined "Buy American. I am." The column encouraged investors to buy U.S. stocks, as he was doing with his personal investments outside of Berkshire.

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," he wrote, repeating an axiom he's used for years to sum up his investing philosophy.

Throughout the nation's economic struggles of the past two years, Buffett and Berkshire have been busy making deals, but few of those were outright acquisitions. Recent big transactions include investing $6.5 billion in equities related to Mars Inc.'s acquisition of Wm. Wrigley Jr. Co., $5 billion in preferred shares of Goldman Sachs Group Inc., $3 billion in General Electric Co., and $2.6 billion in Swiss Reinsurance Co.

Those financing deals have given Berkshire favorable terms, substantial stakes of at least 10 percent and in some cases, warrants to buy stock. As a result the company has collected millions in interest.

Last year, Berkshire failed in its attempt to buy Constellation Energy Group Inc. But even failure was profitable because of the breakup terms.

Berkshire's utility division MidAmerican Energy Holdings received 20 million Constellation shares and $593 million cash last year after Baltimore-based Constellation rejected MidAmerican's $4.7 billion takeover bid in favor of a deal with Electricite de France SA. MidAmerican has since sold the Constellation stock.

Buffett hasn't gone through the recession mistake-free. He acknowledged earlier this year that he shouldn't have bought 79.9 million shares of ConocoPhillips stock when oil and gas prices were near their peak.

But Berkshire has partly made up for that misstep by selling some of the ConocoPhillips stock to generate a loss to offset past capital gains taxes.

Over the years, Buffett's company has bought more than 60 subsidiaries; including clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

Berkshire's biggest acquisition before BNSF was the $16 billion stock purchase of reinsurance giant General Re announced in 1998.

Analysts who follow Berkshire say the BNSF deal will reshape the company because of the railroad's size. Justin Fuller, who works with Midway Capital Research & Management in Chicago and writes about Berkshire online at http://www.buffettologist.com, said this is the kind of elephant deal that Buffett seems to be able to find once every five or six years.

Buffett has said he realized a few years late that railroads had become an appealing investment because they are healthier today than in past years. Berkshire is buying BNSF at a time when railroad profits are down because of the recession. But as diesel prices rise, shipping by rail instead of truck will only become more attractive.

"It's a very effective way of moving goods. I basically believe this country will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit," Buffett told CNBC Tuesday.

Morningstar analyst Bill Bergman said he thinks Berkshire's acquisition of BNSF is consistent with Buffett's long-term philosophy, and the timing is good for the investment.

Bergman said he thinks BNSF will be a good fit with Berkshire's other operating companies, and that could be important even with Berkshire's hands-off management style.

"It's not just energy prices," Bergman said. "I think the fit with the operating subsidiaries is important."

Berkshire owns major utilities through its MidAmerican that rely on coal that moves by rail. Berkshire also owns Acme Brick, Shaw carpet and other manufacturing companies that need to ship products, and it owns major furniture retailers, like Nebraska Furniture Mart, that buy many imported products to sell.

There is no sign that BNSF will be the last major deal for Buffett. He has no plans to retire and says he's having too much fun each day looking for deals.

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