The details behind Berkshire’s deal for Burlington…

December 28, 2009

Last month, when Berkshire Hathaway (BRK.A) announced its plans to buy Burlington Northern Sante Fe (BNI), several stories, including this one hinted at how quickly the deal came together. If memory serves, one story that I can’t seem to find said the deal came together in just 10 days — which seems like some sort of record given the size of the deal.

But it wasn’t until Burlington Northern filed this merger proxy late last Wednesday that the real details behind the deal became clear. As footnoted regulars know, we love to read the “Background of the Deal” section in these docs and this one didn’t disappoint.

As the filing notes, Berkshire Chairman and CEO Warren Buffett had a pre-scheduled meeting on Oct. 22 with Matthew Rose, Burlington’s Chairman and CEO and other senior members of Burlington’s management. That meeting led to another meeting between Buffett and Rose on the evening of Oct. 23. Here’s a snip from the filing that describes that meeting:

At the meeting, Mr. Buffett told Mr. Rose that if the BNSF Board would be receptive, Berkshire would promptly work toward negotiating an agreement for a transaction in which Berkshire would acquire all of the outstanding shares of BNSF not already owned by Berkshire for $100 per share. Mr. Buffett expressed that Berkshire would not want to pursue such a transaction unless it was supported by the BNSF Board. Mr. Buffett discussed a transaction in which 40% of the consideration would be paid in Berkshire common stock and 60% of the consideration would be paid in cash. Mr. Buffett expressed his belief that fair value for BNSF’s common stock was in the mid-$90s per share, and that therefore the $100 per share price he was contemplating was, in Mr. Buffett’s view, as high as Berkshire could pay.

The next morning, Rose called Ed Whitacre Jr., the Chairman of General Motors, who also happens to be Burlington’s lead director. By Oct. 26 — just three days later — Burlington’s board was assembled via telephone to discuss the deal. On Oct. 28, Rose told Buffett that the board was looking for a better price than $100 a share. Here’s a snip from that part:

Mr. Rose requested that Mr. Buffett increase the merger consideration above $100 per share. In response, Mr. Buffett informed Mr. Rose that $100 per share was at the very top of the range that he was willing to pay for BNSF and therefore Berkshire would not be willing to increase the merger consideration. In that discussion, Mr. Buffett confirmed to Mr. Rose that Berkshire would agree to a collar on the stock portion of the consideration, such that the value of the stock portion of the consideration would be fixed at $100 per share so long as the shares of Berkshire Class A common stock traded between approximately $80,000 and $125,000 per share.

During that time, there was some discussion about contacting other potential buyers, but at least according to the proxy, that didn’t appear to happen. The deal was announced on Nov. 3.

Image source: Bloomberg News

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