(The following story by Steve Jordon and Joe Ruff appeared on the Omaha World-Herald website on January 17, 2010.)
OMAHA, Neb. Shareholders of Berkshire Hathaway Inc. of Omaha and Burlington Northern Santa Fe Corp. of Fort Worth, Texas, will hold special meetings that will decide whether Berkshire ends up owning the railroad company.
No one expects serious opposition, but each meeting has its complexities.
Berkshire's $100-per-share offer, worth about $26 billion total, is approximately one-third more than the price of BNSF stock at the time of the offer. Berkshire already owns 22.6 percent of the railroad company's stock and wants to acquire the rest.
Warren Buffett, chairman and CEO of Berkshire, called the purchase an all-in wager on the economic future of the United States.
Matthew K. Rose, chairman, president and CEO of BNSF, said the sale would contribute to America's growth and prosperity.
Berkshire shareholders will meet at 9:15 a.m. Wednesday at the Holland Performing Arts Center in downtown Omaha. BNSF will hold its meeting at 9 a.m. Feb. 11 in Fort Worth.
Following are explanations of what is at stake and what is expected to happen:
Berkshire Hathaway
Will this be like the annual shareholders meeting?
Not at all. Held in the Holland Center's 2,000-seat auditorium, it will attract a much smaller crowd than the 35,000 who jammed last May's meeting at the Qwest Center Omaha. Instead of spending hours answering shareholders' questions, Buffett is likely to answer some questions but will go through the agenda quickly.
Has Berkshire held special meetings before?
Yes. The latest was in 1998 at the Orpheum Theater, when shareholders voted on the $16 billion purchase of General Reinsurance. About 500 people attended. Buffett answered questions for about 40 minutes before the meeting ended with shareholder approval of the General Re purchase.
What will shareholders vote on this time?
Whether to split each Class B share into 50 new shares and to change Berkshire's articles of incorporation to allow the split, and to get rid of the requirement of issuing paper Class B stock certificates. Shareholders won't vote on the BNSF acquisition directly. Although it's virtually assured that Berkshire shareholders will approve the split, the BNSF purchase could take place without splitting the Class B shares.
Approval of the split requires a majority of Class A shareholders, a majority of Class B shareholders and a majority of the combined A and B votes.
Why have Class A and Class B shares anyway?
Berkshire created the Class B shares in 1996 by allowing each Class A share to be converted into 30 Class B shares, each worth one-thirtieth as much as a Class A share. Buffett said the change made it easier for stockholders to give the lower-priced shares as gifts without facing tax consequences, and it stopped some investment groups from collecting fees for selling small pieces of Berkshire stock through investment trusts.
Most companies split their shares when they get close to $100 each, but Buffett has never split the Class A shares. That has helped the Class A share price grow.
Why does Berkshire want to split Class B shares?
Berkshire offered to buy BNSF with $10.5 billion in Berkshire stock and $15.8 billion in cash. By exchanging their shares for Berkshire shares, BNSF shareholders could defer taxes on that portion of the purchase and would become Berkshire shareholders.
If Berkshire splits its Class B shares, small BNSF shareholders would receive a bigger share of their proceeds in stock, thus having the opportunity to own Berkshire shares and deferring some of their taxes.
Some observers also have pointed out that the post-split, cheaper Class B shares might become part of the Standard & Poor's 500 Index, which could increase demand for Berkshire shares. The post-split shares would be perceived as more affordable, and more shares would be traded each day, a requirement for the S&P index. Buffett has given no such reason for the split and has said an S&P listing would make no difference to him.
Would the S&P 500 Index have room for Berkshire, the largest company not on the list?
Conveniently, BNSF would leave the list if acquired by Berkshire.
What would the split do to the price of the Class B shares?
The Class B share price would be one-fiftieth of the pre-split price. At the most recent pre-split price, $3,247, a post-split Class B share would sell for $64.94.
What would happen to the voting power of a Class B share?
Today, each Class B share has 1/200th of a Class A vote. After the split, each Class B share would have 1/10,000th of a Class A vote (50 times 200). But a person with $10,000 worth of Class B shares would still have the same voting power after the split.
Would anything happen to Class A shares?
They would not be split and would keep their same voting power and their same price on the stock market. After the split, each Class A share could be converted into 1,500 Class B shares, if a shareholder wanted.
By issuing $10 billion worth of new stock some Class A shares and some Class B shares Berkshire would increase its shares by about 6.4 percent. In exchange, of course, it would own a railroad.
When would the split take place?
Starting with trading Thursday morning on the New York Stock Exchange.
Why is Buffett using stock in this acquisition, when he objected to Kraft Foods using its shares in its proposed acquisition of Cadbury Plc., the British candy maker?
Experts say Berkshire's shares may be closer to full value than Kraft's, which means Kraft shares would be a less valuable currency in a takeover. Also, the proportion of shares Kraft might issue is higher as much as a 20 percent increase in its shares.
Buffett has said Kraft shouldn't raise its $16.3 billion offer for Cadbury, so his objection is less about the concept of using shares in an acquisition and more about the possibility that issuing shares would raise the dollar value of the Cadbury offer.
In addition, Cadbury's management is rejecting the Kraft offer, while BNSF's management favors Berkshire's offer. Buffett's objection had the effect of driving down Cadbury's stock price, making the Kraft takeover more likely and cheaper for Kraft.
Berkshire is Kraft's largest shareholder, so the lower the takeover price, the better for Kraft and for Berkshire.
Doesn't Buffett generally prefer cash purchases rather than using Berkshire stock?
Yes, but in this case the size of the purchase and negotiations with BNSF's management called for issuing stock for 40 percent of the purchase price. Buffett has said that he keeps a large supply of cash on hand as part of a general strategy of a strong financial position. He is conserving cash in this case by issuing stock and borrowing half of the cash portion of the purchase.
What's this about no more paper Class B stock certificates?
Most shareholders already hold their Class B shares in book entry form an electronic record with their stockbrokers or by Wells Fargo Shareowner Services, which is the agent for Berkshire in the railroad purchase. Each book entry Class B share would become 50 shares automatically when the split takes effect.
Shareholders whose stock is all in book entry form don't need to do anything. Shareholders can keep paper stock certificates, but it makes sense to send them to their brokers or to the Wells Fargo office to become book entries. Wells Fargo will send letters to shareholders who don't submit their shares, urging them to send in the certificates.
Shareholders should NOT destroy their old Class B certificates or try to return them to Berkshire.
Book entry shares are less likely to be lost or stolen, and it's cheaper for Berkshire to manage them. Shares owned by someone who can't be reached could be signed over to the unclaimed property authority in the state where the person lived, after a process that takes two or more years.
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Burlington Northern
What will Burlington Northern Santa Fe Corp. shareholders vote on?
Whether the company should be acquired by Berkshire Hathaway.
How will BNSF stockholders cast their votes?
Stockholders can vote in person at the special meeting to be held at the company's Technology Office Building in Fort Worth, Texas. But both companies have recommended that all stockholders vote by proxy, even if they plan to attend the meeting. The companies have set up a toll-free number that stockholders can call, as well as a Web site where they can vote. Stockholders also can return proxy cards in postage-paid envelopes that have been provided.
How many yes votes are required?
At least two-thirds of the Burlington Northern Santa Fe stock not already owned by Berkshire. The railroad's board of directors unanimously recommended that shareholders approve the transaction, which technically is a merger of the two companies.
If the merger is approved, what happens to stockholders' shares in Burlington Northern?
Each share will be exchanged for $100 in cash or in Berkshire Hathaway stock, or a combination of the two. Berkshire is making the purchase using 60 percent cash and 40 percent stock. Burlington Northern stockholders can request stock, cash or a combination, but the amounts of each they receive will depend on the overall shareholder requests and may be reallocated to achieve as closely as possible the overall 60/40 payment of cash and stock by Berkshire.
What's this about a collar?
The stock component of the deal is subject to price limits known as a collar, which is unlikely but which would come into play if the value of Berkshire shares rises or falls substantially by the official date of the acquisition.
If the average trading value of Berkshire Class A ends up equal to or between $79,777.34 and $124,652.09, the value of Berkshire shares received in an all-stock exchange would equal $100 per Burlington Northern share. If the Class A average trading value is less than the collar, the stock received would be worth less than the $100 per share stockholders would receive if they exchange shares for cash. If Berkshire stock is trading at more than the collar, the stock received would be worth more than $100 per share. Friday's closing price for Berkshire's Class A shares was $97,500 each.
If the Class A stock is trading at an average of $75,000, the Berkshire stock received would be worth about $94.01 per Burlington Northern share. If the Class A stock is trading at an average of $130,000, the stock received would be valued at about $104.29 per BNSF share.
Will Burlington Northern stockholders have to pay capital gains taxes because of the sale?
Shareholders should discuss this with their financial or tax advisers. Generally, shareholders receiving only Berkshire shares would record no gain or loss and would pay no taxes at the time of the sale. Shareholders receiving only cash would declare a capital gain or loss. Shareholders receiving a mix of Berkshire stock and cash would declare a capital gain on whichever is less: the total gain or the amount of cash received.
When do Burlington Northern stockholders have to decide between cash and stock?
Stockholders have been mailed an election form and should return it at least two business days before the sale closes.
When will the sale close?
The sale could take place the day after shareholders meet, as other conditions have been met.
What if stockholders don't decide how to exchange their Burlington Northern stock, or their election forms are not received in time?
Stockholders in those situations would receive cash or shares of Berkshire stock as needed for Berkshire to achieve as closely as possible the 60/40 cash-stock payment. It's difficult to predict how many shares or how much cash each shareholder would receive because the split depends on the stock/cash requests of all shareholders.
How many Berkshire shares would each shareholder receive?
Stockholders who request all stock likely would get at least 40 percent of their proceeds in stock and might receive more, because some shareholders likely will request all cash. Some large shareholders of Burlington Northern stock would receive Class A shares of Berkshire stock, but the exact amount of Burlington Northern needed to qualify for a Class A share depends on how many shareholders want Berkshire shares and how many want cash.
What will Burlington Northern Santa Fe Corp. be called after the merger?
