Thomas Russo of Gardner Russo & Gardner Analyzes Berkshire/Burlington Deal
Tuesday, November 03, 2009SUSIE GHARIB: For more analysis now on why Warren Buffett did the deal, Thomas Russo joins us. Berkshire Hathaway is a top holding in his investment firm, Gardner Russo and Gardner. Hi Tom.
THOMAS RUSSO, PARTNER, GARDNER RUSSO & GARDNER: Hello Susie. Your last question led me to think that that would be a expensive way to conduct an executive recruiting, to hire Mr. Rose for $40 billion. I think there's a lot more to it than that. But go on.
GHARIB: But do you think that he could be one of the, in the running for that CEO job when Warren Buffett does move on?
RUSSO: I think the most important aspect, leadership is important, he's evidenced that. There are other people at Berkshire that evidence great leadership. The most important test I think within Berkshire is how well will the business unit allocate capital? This deal is a fair price, for a very sharply improving business and will probably continue to improve over time. But the real difference between being a major shareholder of a public company and being Berkshire Hathaway wholly owned subsidiary is they will be able to reinvest in an optimal way. It may be that Mr. Rose will spend a lot more money up front, even at the cost of current earnings to build a more secure competitive advantage going forward. But he won't have to worry about Wall Street criticizing him if he pays a much more aggressive stance on capital spending and building up the network.
GHARIB: Let me ask you something else. In terms of Warren Buffett's philosophy about buying companies and how Burlington Northern fits in. Buffett has always said that he's looking for brand names and for businesses that are predictable. Does Burlington Northern fit into that description?
RUSSO: Absolutely, brand name not so important. But the brands are important because they represent a product which people can't do without. And the brand loyalty is a lack of an ability to have an adequate substitute. If you had the only rail into a major market hauling coal from a region or bringing cars, maybe even electric cars from China, if Berkshire's lucky enough, bringing those across the country to the market, if you're the only line or the major competitive line in the marketplace, that's even more powerful than a brand. It's about the sort of market presence that they pick up with Burlington.
GHARIB: The other big announcement today from Warren Buffett is that he's doing a big stock split on Berkshire B shares, a 50 to one. Now we know that Buffett has never been in favor of stock splits. What do you make of the announcement?
RUSSO: I think that there's a discussion sometime ago, maybe at the annual meeting, that Berkshire shares may have been suffering from the same promotional activity that happened years back before they did the B shares, whereby people are bundling together some of the shares and offering smaller pieces out to smaller investors. I think that is an affront to Mr. Buffett. I think he'd like to have the shares be affordable to people and he certainly doesn't want any intermediaries running interference for him. So I think it may respond to that. The desire to get the shares held broadly by people who can now better afford to be a part of this important investment vehicle.
GHARIB: All right. Well we're going to have to leave it there, Tom. Thank you very much for coming on the program.
RUSSO: Thank you.
GHARIB: We've been speaking with Thomas Russo, partner of Gardner, Russo and Gardner.
