Why Buffett's Betting Big

Wow, here’s some mud in the bear market’s eye: Warren Buffett just made the biggest acquisition in Berkshire Hathaway history. In his words, “an all-in wager on the economic future of the US.”

Warren Buffett
Buffett’s trump card: Railroads

Undeterred by the moonshot rise in the S&P over the last eight months and the inevitable coming correction, Berkshire Hathaway announced its acquisition of Burlington Northern Santa Fe this morning. In spite of already owning a multibillion-dollar chunk of the railroad company, Buffett will have to pitch in $26 billion and take on $10 billion of Burlington debt to seal the deal. With a total value of $44 billion, it’ll be the biggest buy in Berkshire history. It’s so big that Berkshire can’t pay all cash. 40% of the deal will be financed with shares of BRK. (Berkshire’s B shares will subsequently be split 50-1… soon to truly be Everyman’s access to BRK.)

“Too many companies sitting around with too much cash and not enough opportunities means we’ll see more deals,” Chris Mayer adds. It’s worth mentioning Chris wrote the following note to his Special Situations subscribers yesterday before Buffett’s announcement:

“The 500 largest U.S. companies — excluding financial firms — hold the largest cash hoard as a percentage of assets since 1960. The Wall Street Journal claims that cash hoard was nearly $1 trillion in the second quarter, or about 10% of total assets. So far in the third quarter — with 248 of the 500 firms reporting — cash has increased to 11.1% of assets.

“Cash is the financial equivalent of a big, soft pillow. It helps you sleep better at night. After the credit crisis turned small balance sheet leaks into lethal holes, executive suites around the country seem determined not let that happen again…

“But there might be another reason why the bigwigs sit on all that cash. They might just not see many good opportunities to invest in right now. In other words, the piling up of cash in America’s corporate treasuries may just mirror the weak economy.

“However, the market is not a kind or patient place. It doesn’t feel fear for long. The market thrives on risk taking. And there is always someone looking to relieve you of your cash. If you can’t think of something worthwhile to do with it, someone else will.

“In the market, the way to relieve one of cash is often through the ‘rough-hewn evolutionary mechanism’ — in the words of the late financier Bruce Wasserstein — of mergers and acquisitions. A takeover solves two problems for an acquirer: What to do with all this cash and how to grow when there don’t seem to be many opportunities to do so.

“I expect we’ll see many more such deals. In our own portfolio, I see several stocks ripe for takeover.”