Warren Buffet's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has just made the biggest acquisition in the company's history by agreeing to buy the remaining 77% of railroad company Burlington Northern Santa Fe (NYSE:BNI) for $100 a share. Including debt, the deal is valued at $44 billion.

The Elephant Deal
For years, Buffett has been vocal that Berkshire had the cash and willingness to make a large acquisition if the company and price were right. Well that day has come, and the company was a railroad. Investors can glean some meaningful insight from Buffett's bet, although we can only guess at all the benefits and reasons for making such a big bet. What Buffett did say in the announcement is that "Our country's future prosperity depends on its having an efficient and well-maintained rail system ... Conversely, America must grow and prosper for railroads to do well." (For related reading about the importance of the rail industry in America, check out The Giants Of Finance.)

IN PICTURES: World's Greatest Investors

The Deal
In typical Buffett fashion, this deal was agreed to very quickly. Berkshire will pay $100 a share in cash or stock. The stock component is designed to minimize tax consequences for those investors who do not want to take the cash. Berkshire has agreed to split the B shares 50:1. Considering Buffett's permanent aversion to stock splits, his willingness to do this is a sign of his high degree of conviction in this deal. The fact that he is willing to exchange stock also suggests his belief that Burlington's shares offer a more compelling value over the long run than Berkshire without Burlington. It may also suggests that many of Berkshire's smaller business that are directly tied to the U.S. consumer and housing markets may be in a funk for many years to come, despite an economic recovery. So betting big on Burlington is certainly a strong way to move the needle at Berkshire.

The market seems to agree, as both companies' shares prices rose upon news of the deal.

The Implications
Rail transport is the most cost-effective way to move goods across land. The industry has become more efficient over the years as tons per mile of goods shipped has increased while costs have decreased. However, I think Buffett also sees a future where rail shipping becomes the de-facto choice for companies that want to save money. If you believe that the future economy will recover but not to the extent of the boom of a couple of years ago, then you can see why railroads will do exceedingly well. In addition, railroads are likely to be first in line to benefit from a sustained economic recovery.

Not surprisingly, CSX (NYSE:CSX), Union Pacific (NYSE:UNP) and other railroads are enjoying this news too. I wouldn't get too excited right away. Buffett is buying Burlington to benefit from it for many years to come. However, the rails as an industry have improved economically and over the long-run, it often pays to bet with Buffett. (For more, check out Think Like Warren Buffett and Build A Baby Berkshire.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center