Warren Buffett’s takeover of Burlington Northern Santa Fe Corp.

Buffett Takeover Reduces Successor’s Need for ‘Amazing Insight’
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Nov. 3 (Bloomberg) -- Warren Buffett’s takeover of Burlington Northern Santa Fe Corp. may reduce his successor’s need for “amazing insight” to lead Berkshire Hathaway Inc.

The deal for the largest U.S. railroad gives Buffett the “elephant”-sized acquisition he’s been looking for to deploy accumulated earnings from Berkshire’s insurance units and investments. Buffett who is vetting candidates for CEO of the company he built over four decades, called his biggest purchase “an all-in wager” on the future of the U.S. economy.

“He knew long ago that his time was limited,” said David Carr, chief investment officer at Oak Value Capital Management Inc. in Chapel Hill, North Carolina. Buffett, 79, has been structuring the company so that it doesn’t have to rely on the next leader for “making deals that require amazing insight.”

Buffett, the world’s most celebrated investor, adds a business in Burlington that was profitable every quarter for at least a decade and remains shielded from competition by its rail network. The purchase marks a shift from Buffett’s strategy in the recession of drawing down Omaha, Nebraska-based Berkshire’s cash hoard, valued at more than $24 billion at the end of June, to finance firms including Goldman Sachs Group Inc.

Berkshire agreed to pay $26 billion for the stake in Fort Worth, Texas-based Burlington it didn’t already own and assume $10 billion in net debt.

‘Opportunities Have Changed’

“It’s kind of like dumbing down the asset base,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP in Greenwich, Connecticut. “It suggests that the long-term opportunities have changed, and going forward Berkshire is not much more than a general call on the American economy, whereas in the past it was a call on Buffett’s investment acumen.”

The deal culminates a search by Buffett that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings. Buffett didn’t return a message seeking comment left with his assistant Carrie Kizer.

Burlington, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second-largest operating unit by sales. Berkshire’s McLane unit, which delivers food to stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008. Berkshire’s largest business overall is insurance, including the Geico Corp. unit.

Sokol, Jain

By expanding operations outside of finance, Berkshire’s operations more closely match the expertise of David Sokol, chairman of Berkshire’s energy business, said Alice Schroeder, the author of “The Snowball,” an authorized biography of Buffett, and a Bloomberg News columnist. Buffett added to Sokol’s duties this year by naming him to head Berkshire’s money-losing plane-leasing unit.

Sokol and Buffett’s reinsurance lieutenant Ajit Jain are among Berkshire executives included on media lists of potential successors. Buffett hasn’t publicly said who will replace him.

Buffett has joked that he built Berkshire so it could be run by a cardboard cutout or the bust of Benjamin Franklin that Munger keeps in his office, Schroeder wrote in the book.

Berkshire will continue to generate cash, giving Buffett the chance to make additional deals in years to come, said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington.

“I don’t think he’s ready to give up control,” Martin said. The Burlington deal is “classic Buffett, I think he’s found a good buy at a good time with a company that has good earnings prospects.”

Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net;

Last Updated: November 3, 2009 14:56 EST

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