Thursday, November 5, 2009

The Deal Professor on Berkshire Hathaway/Burlington Northern (BRK.B; BNI)

From DealBook:

2 Big Deals and the Search for an M.&A. Market

Updated with clarification | Nov. 4, 10:00 a.m. What a difference a day makes. Just on Monday in “Searching for Themes in the M.&A. Market,” I reviewed the dreary figures and transactions in the mergers and acquisitions market last month and noted the absence of discernable trends.

That was Monday, before the stock market closed. In the last 24 hours, we have had announcements of two big strategic transactions. The first, announced late Monday afternoon, was Stanley Worksacquisition of Black & Decker for $3.5 billion in stock. The second, announced Tuesday morning, is truly a blockbuster deal: Berkshire Hathaway’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe for $26 billion in cash and stock....

...In 2008, according to Factset MergerMetrics, 34 percent of transactions offered stock consideration either alone or with cash, but only 9.2 percent of those had a collar. But collars appear to be becoming more common in the distressed market environment because of the protections from volatility they provide. In the case of Stanley and Black & Decker, however, this really is a combination of two similar enterprises, so the parties most likely expected their stocks to trade in tandem, so a collar would be unnecessary.

Meanwhile, Berkshire’s acquisition of the 77.4 percent of Burlington that it does not already own is a pure acquisition. This is a stock-and-cash election transaction with a 31 percent premium. Stockholders can choose to convert their shares into $100 of cash or a number of Berkshire class A shares equivalent to $100 a share. A maximum of 60 percent of the consideration will be cash and 40 percent will be stock, and shareholders will be prorated in these amounts.

In addition, there is a floating collar on the class A stock. The collar is between approximately $80,000.00 and approximately $125,000.00 per Berkshire class A share. If the value of Berkshire stock is outside of this collar range at closing, then the number of shares received of Berkshire Hathaway class A stock will be fixed at either 0.001253489 per Burlington Northern share for values below the collar range, or 0.000802233 per Burlington Northern share for values above the collar range. In this case, the collar is more appropriate since this really is an acquisition and Burlington Northern shareholders are looking for a set amount, while both parties want to minimize the risk from stock market volatility.

In addition, Berkshire, because of its large ownership stake in Burlington, is deemed to be an affiliated shareholder of the railroad under federal securities laws. The transaction will therefore be subject to the going-private rules of the Securities and Exchange Commission....MORE