If you woke up this morning and read the business news, you may have noticed that Warren Buffett (through Berkshire Hathaway), the patron saint of investing, has made a tender offer to purchase Burlington Northern Railroad (BNI). The offer is to purchase the RR for $100 per share in a deal that will be a combination of cash and stock.
Investors in a mood for merger arbitrage have ran into the fray, trying to squeeze a little profit out of Buffett’s purchase. If you’re not familiar with “merger arbitrage,” here’s basically what it is. An offer to buy a company will always be for a higher price than that which the stock is currently trading (otherwise – why would anyone sell – they obviously like owning the stock at the current price, that’s why they do). So say a company’s stock is currently trading at $70 per share. When a deal is announced that the company will be purchased for $100 per share, investors who believe the deal will go through will rush into the stock, driving the price of the shares up toward the $100 purchase price.
This approach isn’t without risk. If the deal doesn’t go through, the price of the stock will come crashing back down toward (and perhaps below) its original price point. As the deal gets closer and becomes more or less likely to happen, the stock price will fluctuate to reflect the probability that the deal will go through. BNI is already at $97.69 as I write this. That means that investors currently feel that there is a very high probability the deal will go through.
Knowing whether a deal is going to go through, though, is difficult for a small individual investor to assess. We’re not plugged into the Wall Street gossip. We don’t work for the companies in question (we shouldn’t be trading if we do). Information regarding these deals won’t come our way first. With that in mind, there’s risk in this approach. In my experience, though, Buffett usually gets his company (though a deal for Constellation Energy fell through last year – Berkshire still made money).
Also related to the deal, if you own class B shares (disclosure: we do), they’re splitting 50-1. That is, for every class B Berkshire share you own, you’ll get 50 shares worth 1/50th as much. The board has already agreed to this wrinkle. It doesn’t really mean anything, mostly class A shares will be used to do the deal. The class B shares are simply a way to pay off BNI’s smaller investors (people like us). Hopefully you owned some BNI yesterday! Thanks for reading.
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