Investment icon Warren Buffett is criticizing Kraft Foods for using exactly the same financial technique as his Berkshire Hathaway.
Kraft wants to issue shares to finance a purchase of Cadbury. Berkshire Hathaway is Kraft’s largest shareholder and issued a scathing rebuke of the idea, saying it would dilute shareholder value.
But Berkshire wants to issue about $10 billion of its own stock to help pay for its $26 billion purchase of Burlington Northern Santa Fe.
“It does seem to raise a contradiction,” David Kass, a professor at the University of Maryland’s business school, told Bloomberg.
“He may be thinking that Berkshire shares are less undervalued than Kraft.”
Charles Ortel, managing director of Newport Value Partners, agrees.
“You don’t sell stock if you think it’s at a low, you sell stock if you think it’s fully valued,” he told Bloomberg.
“He could certainly raise the money without equity if he wanted to.”
Berkshire Hathaway shares have dropped more than 30 percent from the 2007 high to $100,500.
Ortel recommends selling the stock.
In a recent interview with The Wall Street Journal, Buffett said that what enabled him to initiate the Burlington Northern deal was the fact that he didn’t do anything stupid during the financial crisis.
He passed up deals that would have eaten up Berkshire’s capital, making the Burlington Northern purchase very difficult.
"We didn't do all the smartest things,” Buffet told The Journal. But, “We didn't do anything really dumb."
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