Last week's news that Warren Buffett's Berkshire Hathaway (BRK-A) made an offer to purchase power-transmission company Energy Future Holdings Corp. for $9 billion brought about some reactions of surprise from the investor's followers. Buffett, who has risen through the echelons of the investment world thanks to his excellent record as a stock picker, has traditionally invested a substantial portion of Berkshire's assets in equities and other securities. This latest energy bid, along with news that Buffett shared in a recent letter to Berkshire shareholders, signals a change away from that strategy.

Equities and Securities "De-emphasized"

In a February letter to Berkshire shareholders, Buffett indicated that the firm's traditional equities and securities investments were "de-emphasized," explaining instead that Berkshire has been recently earning a great deal more income from its operating businesses. Because of that, Berkshire has undertaken a "gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses," he explained.

This shift seems to have begun as early as 1999, according to an article released by Fox Business. At that time, Berkshire announced that it would purchase its first utility business. Later, in 2009, the conglomerate purchased Burlington Northern Santa Fe, the railroad company. These regulated businesses have yielded steady returns for the company, and Buffett may see them as more stable expenditures than stock investments, which tend to be more volatile.

Energy and Railroad Make Up 24% of Berkshire's Earnings

In 2016, 24% of Berkshire Hathaway's net earnings were derived from its energy and railroad businesses. This marks a significant gain over the figure from a decade prior, which was just 8%. James Shanahan, senior equity research analyst for Edward Jones, explained that "the franchise has pivoted away from equity investments toward acquisitions. The bigger the utility business gets, I think the more important it becomes that the leader of Berkshire Hathaway has a strong understanding of the operations of utility businesses."

Should Berkshire's deal to purchase Energy Future Holdings along with its Texas-headquartered utility Oncor be approved, the conglomerate's earnings would likely increase by about 2%, according to research by Morgan Stanley. Elliot Management Corp. has challenged the deal, explaining that it will put together a separate deal involving a higher valuation for Oncor.

Why might Buffett be shifting his strategy, particularly after so much success with Berkshire's initial approach? Lawrence Cunningham, law professor at George Washington University, suggests that "it is probably a different act to maintain this company than it was to build it...nowadays, in the last 10 years, they've got so much capital." Buffett himself has predicted that the next Berkshire CEO's primary responsibility will be asset allocation.

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