Merge & Acquisitions

On 12th February 2010, Berkshire Hathaway Inc. announced to merge with Burlington Northern Santa Fe Corporation (BNSF).

The M&A details

Omaha, NE (NYSE: BRK.A; BRK.B) – Berkshire Hathaway Inc. (“Berkshire”) today announced the closing of the merger of Burlington Northern Santa Fe Corporation (“BNSF”) with and into a subsidiary of Berkshire. Berkshire also announced the final results for the merger consideration elections made by BNSF shareholders.

The exchange agent for the merger, Wells Fargo Shareowner Services, has calculated that of the 264,507,424 shares of BNSF common stock outstanding as of the effective time of the merger (which excludes shares of BNSF common stock owned by Berkshire and its subsidiaries, all of which were canceled without payment at the effective time), cash elections were made with respect to 108,054,170 shares, or 40.85%, and stock elections were made with respect to 114,692,846, or 43.36%. “No election” was made, or deemed to have been made, with respect to the remaining shares.

Based on the election results and the terms of the merger agreement:
- For all BNSF shares for which cash elections were made, shareholders will receive cash;
- For all BNSF shares for which “no election” was made, or deemed to have been made, shareholders will receive cash; and
- For all BNSF shares for which stock elections were made, shareholders will receive approximately 92.25% of their consideration in Berkshire stock and the remainder in cash.

In the aggregate, Berkshire will
• Pay approximately $15.87 billion in cash (FROM DEBT)
• Issue approximately 80,932 shares of Berkshire Class A Common Stock (NEW ISSUED)
• Approximately 21 million shares of Berkshire Class B Common Stock pursuant to the merger. (NEW ISSUED)

The total comes to approximately 44 billion to buy out the remaining 77.4% of BNSF Railway.

In percentage, Berkshire uses
• 36.06818182 % in Cash
• 63.39318181 % in Equity to buy out BNSF.

The M&A Analysis

So what can we interrupt from the numbers?

First of all, we have to understand there is a great difference between a cash offer and a stock offer in M&A.

In a 100% cash offer, the acquirer assumes the risk and receives the potential reward from the merger, while the gain for the shareholders is limited to the takeover premium. If an acquirer makes a cash offer in a deal, but the synergies (Profit afterward) realized are greater than expected, the takeover premium for a target would remain unchanged while the acquirer reaps the additional reward and vice verse.

In a 100% stock offer, some of the risks and potential rewards from the merger shift to the target firm. When the target receives stock as a payment, the target’s shareholders become part owner of the acquiring company. This means that if estimates of the potential synergies are wrong, the target will share in the upside if the actual synergies exceed expectations.

Yet, the deal which BRK and BNSF ended is 36% in CASH, 64% in STOCK. In fact, if you are detail enough, you can figure out that BRK prefer cash offer than stock offer. From the M&A details, we can see that “for all BNSF shares for which “no election” was made, or deemed to have been made, shareholders will receive cash.”

This reveals that BRK is confident in the synergies (potential earning). On the other hand, shareholders from BNSF seem to be even more confident in the synergies (potential earning). They will like to have stock offer more than cash offer.

After all, you should know where are your synergies.


Thanks
Paul