(The Associated Press circulated the following story by Josh Funk on January 19, 2010.)
FORT WORTH, Texas Warren Buffett's Berkshire Hathaway Inc. is getting ready to split the company's Class B shares Thursday as part of its plan to buy Burlington Northern Santa Fe Corp.
The 50-for-1 stock split, which shareholders will vote on Wednesday, will boost the liquidity of Berkshire's stock and enable Berkshire to offer even small BNSF shareholders Berkshire stock as part of its $26.3 billion cash and stock deal.
The liquidity and lower share price Berkshire will have from the split will also raise the chances that the Omaha-based company will join the S&P 500 index. Berkshire's Class A shares, which are the nation's most expensive stock, and its Class B shares have been difficult to trade because of their high prices.
Berkshire's Class A sold for $97,500 Monday. Class B shares sold for $3,247.
Class B shares, dubbed "Baby Berkshires," were first issued in 1996 to meet demand from smaller investors and to discourage investment firms from reselling pieces of Berkshire's original shares - which became the Class A shares.
Buffett declined to discuss the stock split ahead of Wednesday's special shareholder meeting in Omaha. Berkshire's board has said in documents sent to shareholders that it supports the split regardless of the BNSF deal.
The split will make the $3,247 Class B shares significantly more affordable: They will be worth $64.94 apiece.
"Now everybody will have access to it," said Andy Kilpatrick, the stockbroker-author who wrote "Of Permanent Value: The Story of Warren Buffett."
The fact that the split may lead to inclusion in the S&P 500 is also significant because so many investors rely on it as athe primart gauge of the stock market.
For years, Buffett has measured Berkshire's annual performance against that index in his letter to shareholders.
Being included would also generate new investment in Berkshire because trillions of dollars follow moves in the index, and mutual funds buy stock in the companies in it.
Buffett's charitable plans are another factor that will increase the number of Class B shares available to trade in the future. Buffett has pledged to convert all his Berkshire holdings to B shares and donate them to charity over time.
The Class B split was a key part of the BNSF deal when it was announced in December. Berkshire agreed to pay $100 per share in cash and stock for the 77.4 percent of BNSF shares that it didn't already own. The purchase will be the largest ever for Buffett's company.
Berkshire and BNSF have said they expect the deal to close in the first quarter, and the Ft. Worth, Texas, railroad has scheduled a Feb. 11 shareholder vote on it.
Berkshire expects the majority of the shares issued in the $100-per-share deal will be Class A shares, but holders of smaller amounts of BNSF shares who opt for a share exchange rather than cash will receive Class B shares.
Berkshire Jumps After Buffett Says Stock Undervalued (Update2) January 20, 2010, 06:47 PM EST
By Andrew Frye
Jan. 20 (Bloomberg) -- Warren Buffett, who usually refuses to give his opinion on the value of Berkshire Hathaway Inc. shares, said today the stock is undervalued and that he would have preferred to pay in cash for his largest takeover. The stock jumped the most in five months.
We are paying a penalty issuing shares at this price to raise about $10 billion for the purchase of railroad Burlington Northern Santa Fe Corp., Buffett said in an interview today in Omaha, Nebraska, where Berkshire is based. If I could have done the deal for all cash, I would have done it.
Buffett, who is chairman and chief executive officer of Berkshire, is planning to fund the Burlington Northern deal with Berkshire stock thats fallen by about than a third from its 2007 high. He has chastised Kraft Foods Inc. CEO Irene Rosenfeld for issuing shares of the foodmaker to help fund its purchase of Cadbury Plc. Berkshire is the largest stock investor in Kraft.
Both Kraft and Berkshire are undervalued, he said. While he was reluctant to issue shares of his company at its current price, Buffett said Im still OK with it based on his assessment of the railroad. But its close.
Berkshires Class A shares rose $4,170, or 4.2 percent, to $104,200 in New York Stock Exchange composite trading today, its biggest increase since Aug. 5.
The billionaire takeover expert said in an interview last year that questions about the value of Berkshires stock are the one I never answer. Investors Lawrence Oberman and Arthur Cohen, who attended a special shareholder meeting in Omaha today, said the pronouncement was out of character for Buffett.
Advice to Shareholders
He never says buy my stock, said Cohen, of Northbrook, Illinois-based Arthur M. Cohen & Associates LLC. Oberman, of Northbrooks Trigran Investments Inc., characterized Buffetts typical advice to investors as, I put out my annual report, you read it, and you figure out whats best.
Still, Buffett did advise shareholders that he and Vice Chairman Charlie Munger felt the stock was fairly valued at least once, in the 1995 annual letter to shareholders as Berkshire prepared to sell a new class of shares.
The offering we propose will not diminish the per-share intrinsic value of our existing stock, Buffett wrote. Let me also put our thoughts about valuation more baldly: Berkshire is selling at a price at which Charlie and I would not consider buying it.
Berkshire is paying $26 billion for the 77.4 percent of the Forth Worth, Texas-based railroad it doesnt already own, the largest takeover in Buffetts four decades at Berkshire. The company is tapping Wells Fargo & Co. and JPMorgan Chase & Co. for an $8 billion loan, with the remaining $8 billion coming from Berkshires cash hoard.
True Value
The railroad fell about 15 percent to $76.07 in the 12 months before Buffett agreed to pay $100 a share. Buffett said in a statement critiquing the Kraft deal earlier this month that, when evaluating acquisitions, the true business value of what is given is as important as the true business value of what is received.
Buffetts acquisitions and stock picks propelled Berkshires shares to an increase of more than 30 fold in 20 years. Hes said it has become harder to maintain that pace as his company expands from insurance to energy and manufacturing.
Berkshire advanced 2.7 percent on the New York Stock Exchange last year, compared with the 23 percent rise in the Standard & Poors 500 Index, the companys worst performance against the index in 10 years. Two analysts tracked by Bloomberg have price forecasts on Berkshire averaging $125,000.
Book Value
Investors who bought Berkshire stock at its closing price paid $1.28 for every $1 of net assets. Thats about 11 percent more than the figure for the financial companies in the S&P 500. Berkshires multiple to book value, or assets minus liabilities, has averaged about 1.76 over that past 15 years, compared with 2.17 for the S&P 500 financial firms.
Berkshires price is often related to book value in some way that makes a fair degree of sense, Buffett said. On a historical basis, Berkshire is selling quite low, relative to book value.
Buffett won the approval of investors at the meeting today for a 50-for-1 split of Berkshires Class B shares to reduce the number of partial shares Berkshire would need to issue to holders of Burlington stock.
The B shares were the ones Buffett warned investors against buying in 1996. He created the stock to prevent fund managers from carving up the more valuable Class A shares in trusts and selling lower-priced interests. The B shares have never traded below $990. Based on their $3,476 closing price today, they will be valued at $69.52 when the begin trading tomorrow.
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(The following story by Steve Jordan appeared on the Omaha World-Herald website on January 20, 2010.)
OMAHA, Neb. Shareholders of Berkshire Hathaway Inc. gave nearly 99 percent approval this morning to the first stock split in company history, a change that lays the track for Warren Buffett's company to buy one of the American West's greatest railroads.
Shareholders of Burlington Northern Santa Fe Corp., whose main subsidiary is the BNSF Railway, will have the final say when they vote Feb. 11 on whether to sell the railroad company to Omaha-based Berkshire.
Even though Berkshire shareholders don't get to vote on the purchase, they gave a full-speed-ahead message to Buffett, who has said the railroad purchase is a bet on the future of the U.S. economy and BNSF's role as a major cargo carrier.
Today's vote was on whether to split each of Berkshire's Class B shares into 50 new shares, which will take place at 12:01 a.m. Thursday. Trading in the shares, at one-fiftieth their former price, will begin when the New York Stock Exchange opens Thursday morning.
Buffett proposed the split so that even the smallest Burlington Northern shareholders would receive Berkshire stock and a tax benefit if the sale takes place.
At this morning's meeting, about 175 Berkshire stockholders assembled at the Holland Center's 2,000-seat concert hall in downtown Omaha. Freezing rain overnight and this morning tempered the attendance, but the vast majority of shareholders had voted by mail before the actual meeting.
Burlington Northern shareholders will receive $26 billion $10.5 billion in Berkshire stock and $15.8 billion in cash for the 77.4 percent of Burlington Northern's shares that Berkshire does not already own.
Berkshire's last special meeting was in 1998, at the Orpheum Theater, when about 500 shareholders approved Buffett's plan to acquire General Reinsurance.
This time, Buffett wanted shareholders to split the shares so that when Berkshire issues $10.5 billion worth of stock as part of the $26 billion purchase price for the railroad, even the smallest Burlington Northern shareholders could become Berkshire shareholders. They also would receive $15.8 billion in cash.
Receiving stock for part of the purchase price would let those shareholders defer some income taxes.
The new, smaller-value shares would begin trading Thursday on the New York Stock Exchange, opening at one-fiftieth of Wednesday's closing price. At Tuesday's closing price of $3,337.95, that would be about $66 a share.
The split would not affect the price of Berkshire's Class A shares, $100,090 at Tuesday's close. After the Class B split, each Class A share could be converted into 1,500 Class B shares, instead of the 1-30 conversion ratio before the split.
