Taking Burlington Northern Railroad Private

Abstract

Berkshire Hathaway took Burlington Northern Santa Fe Railroad private in November 2009 in a deal valued at $100 per share, which was approximately 31% higher than the railroad’s share price at the time. Surprisingly, the deal came under immediate criticism from sources relatively close to Warren Buffett, including his official biographer and the value investing professor at his alma mater. The criticism centered on the deal’s price and claimed, essentially, that Buffett uncharacteristically paid too much for Burlington. The author analyzes this deal by valuing Burlington at the time of its acquisition using the modern Graham and Dodd approach. In doing so, he found that it involves a situation that many private equity acquirers could face—namely, evaluating the purchase of a profitable and stable firm with seemingly low-risk expected improvements, which command a higher multiple. In the author’s valuation, he identifies Burlington’s expected improvements and assesses the risks generated by them in a way that could facilitate post-acquisition value realization, which may prove useful to private equity investors.

TOPICS: Private equity, fundamental equity analysis, risk management, legal/regulatory/public policy