Berkshire Hathaway Inc. shareholders approved splitting the company's Class B shares 50-for-1 on Wednesday as part of the company's $26.3 billion acquisition of Burlington Northern Santa Fe Corp.
The stock split will enable Berkshire to offer even small BNSF shareholders Berkshire stock as part of the acquisition of the nation's second-largest railroad. And Berkshire CEO Warren Buffett said there are other benefits to the split.
The stock split will make Berkshire's Class B stock much more affordable at roughly $69 per share. The lower price for Class B shares will increase Berkshire's liquidity, and Buffett said over time, it will likely lead to Berkshire joining the S&P 500 index.
The Class A shares, which remain the most expensive U.S. stock at over $100,000, won't be split. The Class A shares hold more voting rights than the Class B shares.
Buffett said he and Berkshire Vice Chairman Charlie Munger believe the BNSF deal makes sense even though the company will have to issue stock for it at a time when he thinks Berkshire's shares are undervalued.
"Charlie and I like using stock about as much as preparing for a colonoscopy. It's not our favorite activity," Buffett said.
Berkshire has 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. Buffett said Wednesday that Berkshire is actually paying more than $100 per share for BNSF because he thinks Berkshire's stock is worth more than the current market price.
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.
At the same time Berkshire is preparing to use its stock to buy BNSF, Buffett criticized Kraft Foods Inc. Wednesday for using shares to pay for part of its $19.5 billion takeover of British candy maker Cadbury.
Buffett, Kraft's largest shareholder, acknowledged that both Berkshire and Kraft are using what he considers undervalued stock to complete acquisitions. However, he said Berkshire's deal is priced right while Kraft is "paying an extremely full price and using an extremely undervalued stock."
Buffett told about 100 shareholders who attended Wednesday's special meeting that Berkshire probably should have split its Class B shares years earlier to facilitate deal making. So Berkshire would be splitting its stock even if it wasn't for the BNSF deal.
"We would do it to be ready for the next one," he said.
A few of the shareholders at the meeting traveled cross country to attend, so they could question Buffett in a more intimate setting than the annual meeting affords. Howard Alter came from Princeton, New Jersey, to learn more about Buffett's rationale for the Burlington Northern deal.
"As it relates to the long-term future of Berkshire Hathaway, it's certainly a good deal," said Alter, who is managing partner of Roundview Capital.
Plus, Alter said the BNSF deal might even help make the job of Buffett's eventual successor easier because the railroad has significant capital needs, and one of the 79-year-old's main responsibilities is deciding how to use Berkshire's cash.
"There's an element of succession planning there," Alter said.
Buffett has said he has no plans to retire. The company's board has a plan to replace him with a separate chief investment officer, chief executive officer and chairman. But Buffett has refused to name the candidates for those jobs or discuss the details of the succession plan. He said Wednesday that he'd be disappointed if BNSF is his last big deal at Berkshire.
The stock split takes effect Thursday morning. Buffett told shareholders the split will help Berkshire some day become part of the S&P 500.
"We're by far the largest company in the United States that isn't in it," he said.
Buffett said he thinks Berkshire's two classes of stock complicated matters for Standard & Poor's when that firm considered adding Berkshire to its indices. Berkshire's market capitalization of $151 billion would easily exceed S&P's requirement that a company be worth at least $3.5 billion in the eyes of the stock market. But in the past, Berkshire has been left out of the index because its shares have been cumbersome to trade.
However, after the stock split and the BNSF deal, its number of B shares will grow considerably. And Buffett said he thinks more A shares will eventually be converted into B shares.
Berkshire would benefit from joining the index because it would instantly have buyers for about 6 percent of its shares, and those mutual fund buyers that try to mirror the S&P 500 index would plan to hold the stock long-term, which is what Buffett wants.
"Over time, if it's in the S&P, I think it's a slight plus for shareholders," Buffett said.
Berkshire's Class B shares rose $144, or 4.3 percent, to close at $3,476 Wednesday. The Class A shares rose $4,170, or 4.2 percent, to finish at $104,200.
Before opening Wednesday's meeting, Buffett set up a cardboard cutout of Munger in a seat next to him. Buffett didn't explain Munger's absence, but the two have used the cardboard approach for special meetings before.
The two men regularly lead Berkshire's annual meeting each May before a huge crowd.
"This is a little embarrassing because when Charlie is here we have abut 35,000 people. He'll be mentioning this to me," Buffett said.
Berkshire owns more than 60 subsidiaries, including clothing, furniture, jewelry and corporate jet firms, but its insurance and utility businesses typically account for more than half of the company's revenue. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.