Employing 43,500 people, BNSF has assets worth some $60 billion, produces annual revenues exceeding $22 billion, and adds $5 billion to Berkshire’s yearly bottom line.19 Assets include three transcontinental routes using high-speed links. The company hosts commuter trains in several locales, including southern California, New Mexico, and Puget Sound, plus numerous Amtrak passenger train services across America. BNSF maintains transfer facilities throughout the western United States to coordinate freight traffic movement. These include an extensive facility near the port of Los Angeles that directly links rail with overland and sea transport. BNSF owns thousands of locomotives and tens of thousands of freight cars in all shapes and sizes to meet customer needs.
BNSF—and its industry—compete with the trucking industry and have gained advantages in recent years. In the early 2000s, as railroad executives began to speak about return on invested capital, many long-term supply agreements made years earlier at deep discounts—up to 40 percent below market—expired. The companies renewed these agreements at market rates to drive up returns on invested capital.20
As fuel costs rose, BNSF began to make them a pass-through item of transport contracts. Rising fuel costs became a double benefit to rail: the companies did not have to absorb all costs, and customers found rail more fuel efficient than trucking, thus making rail a cheaper choice.21 Increased U.S. trade with Asia and Mexico drove growth, too, especially at BNSF and union Pacific, the nation’s western railways. The railways mirror the country in many ways, with the overall reduction in demand for coal lately being a drag on profits, whereas the overall uptick in fracking, industrial activity, and automobile production has boosted revenues.
Berkshire acquired BNSF gradually, beginning with a series of open-market purchases of its common stock at prices up to $75 per share. In 2010, when it owned 22.5 percent, it acquired the rest in a negotiated acquisition. It paid $100 per share, in a mix of cash and Berkshire stock. It was the only price Berkshire offered, with no negotiation. Twice BNSF’s board pressed its negotiating team to seek more than $100, and both times it was rebuffed.
Buffett explained to the team that his analysis of BNSF indicated that its value was about $95 per share. He was prepared to have Berkshire offer $100 in order to guarantee fairness to BNSF shareholders. He was also willing to offer Berkshire stock as part of the deal—not unprecedented in Berkshire acquisitions but done reluctantly—and to give assurances that the number of shares delivered would meet a minimum dollar amount. But he was unwilling to budge on price. BNSF did not seek out any competing bids, as advisers doubted that any superior proposal would be forthcoming.22
Some question whether $100 per share for BNSF meant Berkshire overpaid. The price was more than twenty times BNSF’s earnings, high by many standards. The ratio was even higher after accounting for how BNSF’s capital outlays exceed its depreciation allowance—which would reduce earnings. Critics also wonder about how valuable some BNSF assets are, especially rights of way, which are not useful in other applications and cannot readily be sold.
Take Buffett at his word and say BNSF was worth closer to $95 per share. Why pay $100? BNSF boasts many more intangible values, especially its logical cultural fit for Berkshire and its large size. There is also growth potential. Experts and industry insiders—Matthew K. Rose among them—expect a final round of railroad industry consolidation. They foresee two gigantic systems blanketing North America competing head to head in all regions.23 BNSF will be one of them.
In addition to exemplifying engagement in rudimentary business—transporting energy, food, and freight across the continent—BNSF is budget conscious and earnest, invested deeply in its reputation, and promotes entrepreneurship in a much flatter organization compared to traditional railroad culture. It is imminently focused on the very long term, routinely acquiring or building assets expected to last up to fifty years. With returns on equity exceeding 20 percent annually in recent years, BNSF is worth every penny of what it cost to acquire.24
It isn’t just the fact of modest engagement in rudimentary businesses that distinguishes Berkshire subsidiaries; many also share events in their corporate histories in which they learned the hard way the value of sticking to the basics. In a number of cases, a company made a strategic shift, only to realize its mistake and return to fundamentals. Think of FlightSafety’s short-lived entry into training ship captains and operators of nuclear reactors or Dairy Queen’s flirtation with conglomerate status when acquiring a ski-rental company and a campground chain.