Why Did Warren Buffett Really Buy Burlington Northern?

Tuesday morning, we woke up in the United States staring at the Dow Jones futures down almost 100 points.  A big down day certainly would have fit the pattern of the last few days.  Up, down, up, down.  Then, we got the news that Berkshire Hathaway was purchasing Burlington Northern Santa Fe (BNI) for $100/share, or $26 billion.  This was a 31% premium over Monday’s closing price.  Buffett already owned 23% of BNI and now he owns the whole enchilada.

As soon as this news spread, the futures healed up and we finished with a stronger market than the futures were indicating.  The speculating began about why.  Why would Warren Buffett buy this company now and why at such a premium?

There are all kinds of reasons being tossed around why Warren Buffett purchased the rest of Burlington Northern.  He believes in the U.S. economy.  He had too much cash.  He wanted a business with plenty of cash flow.  Those all may be true but the real reason Warren Buffett purchased BNI is because he’s adjusting his portfolio to reflect the macroeconomic situation.  For years, he’s been known for purchasing insurance companies because they were such a great business.  Coincidentally, he’s owned insurance companies during a period where interest rates have fallen from the high teens to under 5%.  You see, insurance companies own lots of bonds.  Bonds do very well when interest rates fall.  Warren Buffett has basically been buying lots and lots of bonds for years enjoying capital gains from those purchases.

Now, he sees and worries about the same thing I worry about,  interest rates.  That means he needs to diversify away from bonds into businesses that will benefit from rising rates and inflation.  Burlington Northern is a company that transports lots of goods around the country, including commodities such as coal.  This is a play on the need for commodities around the world and inflation.  Pure & simple.

Mr. Buffett still has it.



4 Responses to “Why Did Warren Buffett Really Buy Burlington Northern?”

  1. 1 Raja November 3, 2009 at 9:25 pm

    Interesting perspective Karl. Basically Mr.Buffett wants to protect against commodity inflation by participating in the commodity rally.
    I was thinking more along these lines “Could it be Buffet is looking at our so called clean energy policy ( or not a policy to speak of ) and saying without new nuclear plants and more offshore drilling, America is not going anywhere with respect to energy independence and the dependence on coal will be an indirect result of the policies whether our government likes it or not.


  2. 3 tom November 4, 2009 at 9:32 am

    Karl, if commodities and interest rates rise from where they are here the US economy and world economies are going to be in trouble. The world can not afford crude over $100 for any extended period of time right now.

    • 4 keggerss November 4, 2009 at 12:20 pm

      I think the U.S. economy would struggle more than most economies. The world can’t afford $100 oil for too long but as they say “the cure for high oil prices is high oil prices”. Alternatives will be part of our lives going forward but I do believe we should get used to higher oil prices.

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