Some analysts have been puzzling over the high price Buffett agreed to pay for Burlington Northern Santa Fe (BNI). He paid $100 a share for a company that has earned $5.38 over the last 12 months for a trailing multiple of 18.6. Book value is $36 a share.
Buffett himself admitted that he stretched to make this deal: “I stretched on this one. I went to the last nickel,” he said in an interview. What explains the deal, then, is not valuation but more complex motives relating to Buffett’s age and legacy.
The primary motive, in my opinion, for the purchase was to make Berkshire easier to operate for Buffett’s successor. According to all sources, Burlington has great management and will essentially run itself. “He’s trying to acquire these companies that can just chug along with or without him,” analyst Paul Howard of Janney Montgomery Scott told The Wall Street Journal. After all, Buffett is 79 years old.
Second, this puts a lot of cash to work preventing his successor from making a potentially bad investment.
Understood in this context, the high premium makes more sense. This is not a classic Buffett buy. It’s not a deal Buffett would have done 30 years ago.
For more on this interpretation of the Burlington deal, see “Buffett Revisits Hunting Ground For Survivors”, Alice Schroeder, Bloomberg, November 3. Schroeder is the author of a recent biography of Buffett called The Snowball.