In case you haven’t heard already, Warren Buffet’s company Berkshire Hathaway recently announced their intent to purchase of Burlington Northern Santa Fe, one of the major North American Class One Railroads. The purchase included the 70% of the railroad not already owned by Berkshire, a deal valued at around 34 billion dollars. I know the announcement is old news at this point, but I wanted to go ahead and get in my take on things.
First off, I look at this as vindication of my own bullish outlook on the railroad industry. I’m paraphrasing, but it was once said that the steel wheel on the steel rail was “the most brilliant transportation invention devised by man”. As transportation gets more expensive in the future the railroads will continue to be a better bargin. They represent a solid long-term investment.
Railroads are also a conservative investment, and I don’t think this was lost on Buffet as he approaches his twilight years. Clearly he wants solid performers for his company in the future without some of the growth he might have seen in his younger years. At this point larger railroads are a clear conservative investment as it would be near impossible for a new Class 1 to emerge. The current Class 1′s have been built up by combining so many railroads over such a long period of time I really don’t see them letting any new players past the regional railroad level.
Now some have suggested that this purchase by Buffet will spur the last round of mega-mergers and soon we will only have 2 major railroads nationwide. I don’t buy this argument. I think the present situation is an extremely stable setup and don’t think the business world of the political world is accepting to the thought of new mergers. I wouldn’t be surprised to see a Class 2 be bought out but don’t think anything major will happen.
There was a big article in the Wall Street Journal Saturday comparing Buffet to a modern day Vanderbilt. While I’m sure he appreciates comparisons to the ruthless railroad tycoon, I wouldn’t put Buffet on the same level as the venerable Commodore. Vanderbilt created the New York Central System nearly single handed and all the while helped create the financial systems that made it possible. Check back later this week for a more extensive biography.
So what do you think this deal means for the railroad history as a whole? Let me know in the comments below.
Further Reading
- Has Buffed Overplayed his Hand?
- BNSF Railroaders Stunned and Hopeful
- Why Warren Buffet is Buying Railroads
- Awesome Train Set, Mr. Buffet (New York Times)
Disclaimer: I may be a business major but that doesn’t give you any excuse to accept any investment advice you may gleam from me in this article.