The Fine Print of Buffett's $44 Billion Deal

Andy Obermueller's picture

Tuesday, November 3, 2009 - 11:37am

by Andy Obermueller

Berkshire Hathaway (NYSE: BRK-B) is set to take off.

The news that uberinvestor Warren Buffett's holding company would take over Burlington Northern (NYSE: BNI) in a $44 billion "all-in wager on the economic future of the United States" has made headlines around the world.

Everyone says it's Buffett's biggest deal.

Everyone points out that Buffett looks to have bought near the industry's bottom.

Everyone is talking about the premium that Burlington's investors will receive.

All true, I say, and maybe even marginally interesting.

But those three water-cooler factoids aren't the part of the deal that's going to affect your portfolio.

The most important thing -- the part that presents a real opportunity for you, today -- is the split.

A "split" is a common Wall Street strategy that affects the number of shares and their price but not the company's overall market capitalization. If a company has 5,000 shares each worth $1,000, it's a $5 million company. If the board of directors changes the structure of the stock and decides to have 10,000 shares, each share is now worth $500. The company has the same market cap -- both companies are worth $5 million -- but the ownership structure changes.

A "reverse" split is also possible: That occurs when companies reduce the number of shares outstanding, such as issuing one share for every five. The price of an individual share rises, but, again, the market cap stays the same.

Splits and reverse splits can have serious repercussions. It changes who can own the company. If a penny stock engineers a reverse split, for example, then it can be held by institutions that have arbitrary minimum share price thresholds, which tends to raise the price. If Berkshire splits, you and I can own it without mortgaging the house and selling a kidney, and we bid up the shares as we seek to add a heretofore unavailable investment -- in one of the most respected companies in the world -- to our portfolios.

Berkshire is splitting its Class B shares. Buffett has opted for a 50-for-1 split. Investors who own one share worth $3,200 will receive 50 shares worth $64 each. The amount of market cap stays the same: $64 times 50 shares is $3,300, the original price of the B share.

Berkshire has never split its shares, so this is a first.

Beyond that historical milestone, the split means something else. It will, for the first time, put direct ownership of Berkshire Hathaway into the hands of the average investor.

Very few investors can afford the platinum-tinged A shares. And a round lot of B -- that is, 100 shares -- is roughly the same price of a new Rolls-Royce Phantom. Many investors think twice before buying one share of Berkshire. Now they can buy 100 shares of Berkshire for about the same price as 100 shares of United Technologies (NYSE: UTX) or Schlumberger (NYSE: SLB).

Now, investors who thought they could never afford Berkshire Hathaway will be able to buy it. And for the first time in many, many years, Berkshire could well start to look like -- and be valued like -- a growth juggernaut instead of like a staid and stodgy insurance conglomerate.

Watch, my friends, as Buffett mania sweeps the Street.

It's happened before. Buffett famously sat out the tech boom and, after a dismal prediction in Sun Valley, Idaho, in 1999, the Oracle of Omaha outright offended many upstart entrepreneurs with his harsh assessment of their businesses, which he basically said were doomed to fail. A "new paradigm," Buffett said, is "like new sex. There just isn't any such thing."

The Nasdaq was at 2800 at the time of his first prediction and the tech-heavy index would nearly double, peaking above 5000. But then it would fall just as quickly, as Buffett's prophesy came to pass. The Nasdaq has never regained its heights. Buffett was cheered by the investing class, Berksheve had a couple of great years and the Sun Valley speech is now taught in business schools.

Welcome, friends, to Buffett 2.0. And watch, I implore you, as this wise Midwesterner is once again proven remarkably prescient by this $44 billion deal. Witness how each step the economy takes toward recovery increases the value of this deal.

And watch how everyday investors bid up Buffett every step of the way.

The opportunity, today, is to buy Berkshire B shares.

It's selling for $3,300 a share, but I don't want you to look at it that way. I predict post-split Berkshire B will be a $100-$125 stock. The $65 post-split price will disappear almost immediately, as investors clamor to own some storied Berkshire Hathaway -- and a piece of whatever Mr. Buffett does next.

Andy Obermueller does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.