Buffett’s New CEO Shows Analysts, Hedge-Fund Managers to Door
Buffett’s Berkshire Hathaway Inc. completed the buyout yesterday after winning the approval of Burlington Northern investors. The deal, valued at $100 a share, allows Rose to hand out returns of nearly 300 percent, plus dividends, to investors who bought stock the day he was named CEO in 2000. The problem, he said, is that shareholders with that length of commitment are dwindling in number and influence.
“When I started as CEO 10 years ago, the typical investor had a time frame of three to five to seven years,” Rose said in an interview. “Year-by-year, that’s gotten shorter.”
The increased focus on short-term results, fueled by real- time media and quarterly analyst calls, can be a distraction for a railroad executive who needs to buy locomotives that run for 20 years and put down tracks that last for 40, Rose said. Burlington Northern said last month it would commit $2.4 billion this year to capital projects, including track, signal systems and locomotives, about $240 million less than in 2009.
“The money I spend this year really won’t pay off for three, four, five or seven years down the road,” said Rose, 50. “There’s the advent of the hedge fund which has changed the time horizon of what satisfies the institutional investor.”
In Buffett, the second-richest American, Rose reports to a boss renowned for his buy-and-hold strategy. Berkshire is the biggest investor in Coca-Cola Co. and American Express Co., and Buffett has held those stocks for more than two decades even as both trade below their top prices in the 1990s. Berkshire also owns insurance subsidiaries like Geico, manufacturers such as Clayton Homes, and energy firms like MidAmerican.
“I think that Rose and Warren Buffett are on the same wavelength,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “Buffett expects his managers to take a long-term perspective, maximizing profit long-term rather than setting short-term targets.”
The Burlington Northern deal, for about $26.7 billion, is an “all-in wager” on the U.S. economy and will produce profits for Omaha, Nebraska-based Berkshire for the next century, Buffett has said since announcing the deal in November. It’s the biggest takeover of the 79-year-old Berkshire CEO’s career, and brings about 35,000 railroad employees, 6,700 locomotives and more than 200,000 freight cars to haul coal, grain and consumer goods.
Railroad revenue is sliding as the recession curbs shipping demand. Burlington Northern, based in Fort Worth, Texas, slipped to second among U.S. railroads last year after sales dropped 22 percent to $14 billion. Publicly held Union Pacific Corp. of Omaha posted a 21 percent revenue decline to end 2009 with $14.1 billion in 2009.
“The speed of the news today I think has harmed, quite frankly, investors looking at long-term assets,” Rose told reporters in a news conference this week. A long-term perspective is “one thing that our country has kind of lost sight of, not just for the railroad equity investor but for a lot of investors.”
Being part of Berkshire takes pressure off Burlington Northern to meet short-term expectations, said Tony Hatch, a self-employed railroad analyst based in New York. “You can argue that not having to deal with quarter-to-quarter numbers is a very positive thing,” Hatch said.
Buffett’s company will pay Burlington Northern shareholders about $15.9 billion in cash and issue about 80,932 shares of Class A stock and 21 million Class B shares, Berkshire said in a statement.
The cost for the 77.4 percent of the railroad the Berkshire didn’t already own is $26.7 billion, based on a price of $114,000 for the Class A and $76.90 for the Class B. That values all of Burlington Northern at $34.5 billion. Berkshire is also assuming about $10 billion of the railroad’s debt, the company said Nov. 3.