Warren Buffett has just closed the largest deal of his spectacular career with an agreement to purchase the Burlington Northern Santa Fe Railroad for $26.3 billion. Buffett's Berkshire Hathaway already owned 23 percent of the railroad, and paid a 31 percent premium over the stock price to secure the rest.
There has been more than a little puzzlement in much immediate media reaction to the biggest gamble yet by the low-key "Sage of Omaha." In an age when hi-tech industries often dominate business reporting, rail seems old-fashioned. Yet Buffett often invests in very traditional companies, complementing his traditional image.
Old-fashioned rail moves freight with unique effectiveness. Buffett estimates the average freight train carries the load of 280 eighteen-wheeler trucks. A Burlington train moves a ton of goods 470 miles on a gallon of diesel fuel. Enormous capital investment and firmly established rights-of-way provide railroads with steady and reliable cash.
Buffett favors the very big deal, and this is the biggest by far for him, substantially larger than his previous peak of $17.8 billion for insurer General Re in 1998. Buying the railroad is also congruent with his announced decision during this recession to emphasize investing in America. Last year, he committed $5 billion and $3 billion respectively to Goldman Sachs and General Electric.
Railroads, which encompassed an enormous percentage of the total national workforce at the start of the 20th century, employ only a small proportion today. However, rail jobs are expected to expand steadily in the future.
The railroad workforce is markedly older than the overall national labor force, a point dramatically demonstrated in the research of Pasi Lautala, a scholar at Michigan Technological University. He notes that specialized programs in rail management and maintenance are almost nonexistent at U.S. colleges and universities today. Meanwhile, an aging U.S. population, auto congestion, and high gas prices are helping fuel a return to passenger rail.
With the passage of time, economic evolution and fundamental political reforms pressed in particular by Theodore Roosevelt, the early often-deserved public reputation of railroad leaders as robber barons has faded. In the 20th century other industries, in particular oil companies, generally replaced the railroads as the primary focus of populist ire.
Today, expansion of freight rail is consistent with a steadily more global United States economy. Chicago is now the fifth largest container port in the world, after Hong Kong, Singapore, Shanghai and Shenzhen China. Exceptional integration of rail with truck, ship and air transport explains the remarkable success of the Midwestern U.S. city.
Railroads in America are also historically rooted in dimensions reaching well beyond pure commerce. Abraham Lincoln, like Warren Buffett, projected a homespun down-to-earth image, but he was also an enormously successful corporate railroad lawyer. Lincoln found time early in the Civil War to initiate the Transcontinental Railroad. He also emphasized rail transport of troops and supplies, primarily to help compensate for initial Confederate advantages of shorter interior supply lines and exceptional ground combat effectiveness.
The latest Berkshire Hathaway investment may also be part of a subtle succession plan, as Liam Denning has noted in "The Wall Street Journal." Buffett is now 79 years old. All strong leaders are hard acts to follow, but his genius for spotting unrealized value may well be unique. A solid, substantial railroad asset may mitigate the uncertainty sure to follow his departure from Berkshire Hathaway.
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College. E-mail him at acyr(at)carthage.edu
COLUMN
He is the best of all
Ibelieve in the old man;you just wait and see what things would turn around.
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