Berkshire's Burlington Northern Deal Finally Gets Scrutiny

Last November, I wrote this post concerning Berkshire Hathaway's offer to purchase Burlington Northern railroad.

Among my observations were these,

"First, because Berkshire already owned 22% of BNI, Buffett was able to secure a private screening of the recent board presentation. As an effective insider, then, Buffett had special knowledge that you or I don't about the company's recent and prospective performance.

I don't believe such knowledge made the ultimate difference in Buffett's offer, but it does show how and why Buffett can get deals you cannot. And won't be hauled into court, either, for doing them. Like, oh, say a Sri Lankan-born hedge fund manager?

It also explains why Buffett doesn't want competition in this bid. If he had approached the BNI management publicly, and/or with an investment bank, he may have had one or more hedge funds quickly raise the price through arbitrage.

But right now is a good time to buy. While liquidity is high, M&A activity hasn't re-ignited yet on a large scale. There probably isn't a single business competitor who is positioned to take BNI without anti-trust issues. And it would take some time for even a few private equity groups to collaborate on a bid for BNI. Plus, they tend to want quicker returns than Buffett will accept.

Again, here is where Buffett gets opportunities others do not. How many investors would sit still for being told that a $44B acquisition is carrying a 30% premium and may not pay off for a decade? Most would redeem at the next quarterly window."

Well, it seems I wasn't the only one who noticed this latent unfairness. The Wall Street Journal reported this morning that the SEC is looking into Berkshire's/Buffett's possible violation of "13D," a regulation governing how and when large shareholders must inform other shareholders of the former's "plans or proposals" to take control of the firm.

In the Burlington Northern case, one could argue that Buffett triggered that when he made his oral offer to buy the shares of the firm that Berkshire didn't already own.

The Journal goes on to note that this informal, quiet approach, which Buffett so often uses, tends to depress the acquisition prices he must pay for his targets.

Hmmm....sounds sort of, well, illegal and cronyistic, doesn't it? A large firm's wealthy, influential CEO being allowed liberties with SEC regulations that ordinary investors don't get?

The Journal piece notes that enforcement of 13D

" has long fallen into a gray area. Potential buyers are loath to disclose a potential deal, fearing that it could upset their ability to complete the transaction. The SEC, meanwhile, has shown only spotty attention to this area of the law over the years, say securities attorneys."

According to one attorney quoted in the Journal article,

"Once the large shareholder decides that it plans to make an offer, that is a material change. You have a duty to amend your 13D filing promptly. There is no real dispute on this."

This would, of course, have affected several of Buffett's prior deals, but, most significantly, the recent BNI caper.

It's no doubt wildly naive and optimistic to believe that Buffett will be vigorously pursued and charged in this matter. The guy has managed to so ingratiate himself with Congress and the current administration that it would be like sending your own grandfather to jail if Buffett were appropriately dealt with in this matter.

How's that for crony capitalism?