Tags: warren | buffett | cadbury | burlington

Ignore the Critics. Buffett Knows Exactly What He's Doing

By Bill Spetrino   |   Tuesday, 12 Jan 2010 05:30 PM

In a recent news item, several observers question the wisdom of Warren Buffett’s decision to publicly berate Kraft for wanting to issue shares to buy Cadbury, thus diluting the stock.

In essence, they said, he did the same thing when he used Berkshire stock to buy railroad Burlington Northern.

Comparing the Cadbury-Kraft deal to Burlington is ridiculous and patently false. These guys are mistaken.

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It is very simple: Buffett is Kraft’s largest shareholder and he does not want Kraft getting into a bidding war for Cadbury and using an undervalued stock as currency instead of debt.

Buffett’s purchase of Burlington Northern, however, is classic Buffett.

Buffett is offering investors cash or shares of stock. Most Burlington shareholders will be anxious to get cash and you can bet the amount that actually takes the stock will be lower than now believed.

Also, by splitting the stock for the “Burlington shareholders,” it allows Buffett to split the shares 50:1. This should raise the price of Berkshire shares for three reasons.

• Many parents who want to buy their kids shares of Berkshire “B” shares will be able to do this for less than $100 dollars per share.

• It is likely, because of the split, that Berkshire will be part of the S&P 500.The only thing holding them back is that they do not have enough shareholders.

• Short-sellers like Doug Kass and others who brazenly shorted the stock will be less apt to short a stock like Berkshire now with its increased volume, especially if it becomes member of the S&P 500.

Shareholder value will be unlocked by the combination of the low price and the fact many mutual funds that mimic the S&P 500 will have to buy it. Nobody, post-Cadbury, will be obliged to buy Kraft. Or at least no more than before.

Buffett has always said he wouldn’t split the stock just to unlock value. So this whole deal was “designed” by the genius himself to do just that but make it look like it’s for the small Burlington shareholders. Genius.

Whatever. Those of us who have been shareholders and studied him for 25 years know better.

I became financially independent primarily by following and investing in Berkshire and Buffett’s selections.

Look, you may not like Buffett saying he won’t buy tobacco stocks and then buying beer stocks. Or telling you to pay estate taxes then leaving his stock to his kids and the Gates Foundation and avoiding the taxes he told you to pay.

But Buffett would never do anything to hurt his present shareholders. Buffett got rich with us, not off of us. I’ll bet you Berkshire is worth more 12 months from now.

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