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Buffett bets on Rose's talent

Updated: 2009-11-09 07:50
(China Daily)

Buffett bets on Rose's talent

Warren Buffett prefers not to interfere in the running of firms he acquires. Bloomberg News

WASHINGTON: Warren Buffett didn't just buy a railroad when he announced his purchase of Burlington Northern Santa Fe Corp. He hired the engineer, too.

"It's a bet not only on the company but on talent," said Gary Bradshaw, portfolio manager at Hodges Capital Management Inc in Dallas, which owns 150,000 Burlington Northern shares. "I can't imagine anything changing. That's Buffett's style. He's always bet on management and let those guys run it."

Chief Executive Officer Matthew Rose has led Fort Worth, Texas-based Burlington Northern to the top of the US industry in sales. Revenue almost doubled through 2008 from 2001, his first full year at the helm. That growth outpaced the 50 percent rise at Union Pacific Corp, his biggest competitor. Becoming a part of Buffett's Berkshire Hathaway Inc, with its AAA credit rating from Standard & Poor's, may make Rose's job easier by lowering his company's borrowing costs.

Berkshire has been building its stake since 2006, giving Buffett a glimpse of Rose, 50, a 16-year employee who has been CEO since December 2000. In a Nov 3 statement, the Berkshire chairman and chief executive said the deal was an investment in the railroad, "Matt Rose and his team".

Buffett didn't return a message left with his assistant Carrie Kizer.

Berkshire's largest purchase will cost the company $26 billion, or $100 a share in cash and stock, for the 77.4 percent of the railroad it doesn't already own. Including the previous investment and debt assumption, the deal is valued at $44 billion, Omaha, Nebraska-based Berkshire said.

Expanded capacity

What may have attracted Buffett to Burlington Northern is the company's reduction of expenses as it expanded capacity, said Anthony Hatch, an independent railroad analyst based in New York.

"One of the ways they've improved is taking a high percentage of their variable costs down," including by using longer and fewer trains, which has increased average velocity across its system, Hatch said.

Hatch also cited Burlington Northern's development of its intermodal business, beginning in 1989 under Rose's predecessor Robert Krebs. Intermodal refers to containers that move by a combination of rail, road and sea. Krebs, now a director of General Motors Co, set up a partnership with Lowell, Arkansas-based J.B. Hunt Transport Services Inc, now the third-largest US trucking company.

Since taking over as CEO, Rose has continued the strategy, Hatch said.

New tracks

"In my nine years we've probably laid out $25 billion worth of capital for our railroad," said Rose, who earned $15.6 million in total compensation last year, according to a Securities and Exchange Commission filing.

Those investments include new locomotives and adding tracks alongside existing ones, he said. Operating parallel tracks boosts train speeds. On the single-track lines that are the most prevalent in the industry, a train heading in one direction must pull off on a siding to let oncoming traffic pass.

During a quarterly earnings call on Oct 22, Chief Financial Officer Thomas Hund said spending on tracks, equipment and other improvements would remain at $2.6 billion for 2009. Being owned by Berkshire probably won't change those plans, said Jason Seidl, an analyst at New York-based Dahlman Rose & Co.

"If he was buying a railroad that was small and capital- constrained, there would be a big change if you're with Berkshire," Seidl said of Buffett's deal. "But Burlington generates an enormous amount of free cash flow."

Bloomberg News

(China Daily 11/09/2009 page11)

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