Buffett Goes Shopping - BNSF Railway, Precision Castparts, and Kraft Heinz

When you manage tens of billions of dollars, you cannot buy small companies and move the needle anymore. You need elephants. Between 2009 and 2015, Buffett bagged three of the biggest elephants of his career – a railroad, a precision manufacturer, and one of the largest food companies on the planet. Each deal tells you something different about how he thinks, and each has practical lessons even for much smaller accounts.

BNSF Railway – An All-In Bet on America

On November 3, 2009, Berkshire Hathaway announced it would purchase the 77.4% of Burlington Northern Santa Fe it did not already own for $26 billion in cash and stock. Including assumed debt, the total deal was worth $44 billion. At the time, it was the largest acquisition in Berkshire Hathaway’s history.

Think about the timing here. This was near the end of the 2007-2009 financial crisis. People were genuinely questioning whether the American economy would recover. Banks were failing. Housing market was in ruins. And Buffett goes out and buys a railroad – a business that literally cannot succeed unless the American economy is healthy. Railroad operators need consumers buying goods and businesses producing them. Without that, trains sit empty.

Buffett called it “an all-in wager on the economic future of the United States.” Then he added: “I love these bets.”

BNSF shareholders got $100 per share, roughly 60% cash and 40% Berkshire stock. Before the announcement, BNSF was trading around $76. For the cash component of $16 billion, Buffett used half from reserves and borrowed the other half. After closing, Berkshire still had about $20 billion sitting as dry powder.

Here is what I find remarkable: the acquisition did not require significant due diligence. Buffett already understood railroads. When you have spent decades studying businesses, sometimes you just know.

How Did It Perform?

Since BNSF went private, exact returns are hard to pin down. But the company still files separate SEC filings. In fiscal 2008, the last full year before Buffett bought in, BNSF reported net income of $2.1 billion. By fiscal 2015, that number was $4.25 billion. That works out to roughly 10.5% compounded annual growth in earnings. Not the spectacular double-digit returns of early Buffett, but very solid for a $44 billion deal. And remember – this is a railroad. It is not going anywhere. It throws off cash year after year after year.

Lessons From the BNSF Deal

Do not dismiss industries with bad track records. Railroads had what Buffett described as a “bad century.” The historical performance of the industry was terrible. But industry consolidation and improved technology transformed the economics. Today’s railroad companies are far more efficient than their predecessors. And here is the kicker – nobody is building new railroads. The capital required is too massive. The existing network already touches every important urban center in America. So current operators have a near-permanent competitive moat.

For regular investors: do not automatically exclude a company just because its industry has a poor historical track record. Some of the best opportunities come from turnaround situations where underlying economics have fundamentally changed but the market has not noticed yet.

Be decisive when you know. Buffett told BNSF he would pay $100 per share on a Friday. The board discussed it over the weekend. By Sunday, a contract was signed. Two days from offer to deal.

This speed is only possible when you have done your homework in advance. Decisiveness lets you analyze more opportunities. If a stock is attractive after due diligence, buy it and move on to the next idea. If not attractive, drop it and look elsewhere. The investor who turns over the most rocks wins the game.

Precision Castparts – When Management Is the Real Asset

On August 10, 2015, Berkshire announced it would purchase Precision Castparts for $37.2 billion, which came out to $235 per share – a 21% premium to the previous closing price. This was now the largest acquisition in Berkshire’s history, surpassing even BNSF. And Buffett funded the entire thing with cash. No stock, no debt. Just cash.

Precision Castparts was a Portland, Oregon-based manufacturer of metal components for aircraft engines and industrial gas turbines. The company was doing $10 billion in revenue and $1.5 billion in net income. These are critical, precision-engineered parts that go into Boeing and Airbus jets, General Electric turbines. You do not switch suppliers for components like these on a whim. The switching costs are enormous, which creates a natural moat.

But here is the thing – what Buffett was really buying was management.

Mark Donegan – The CEO Worth Billions

The CEO of Precision Castparts was Mark Donegan. During 13 years leading the company publicly, the stock climbed 20-fold. Revenue quadrupled to $10 billion. He acquired dozens of businesses and consolidated PCC’s position as the go-to aerospace supplier. He was named one of the world’s best CEOs alongside Jamie Dimon, Jeff Bezos, and Buffett himself.

Buffett said: “I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry.”

Here is the part I find most interesting. Buffett argued that going private would make Donegan even more effective. No more quarterly earnings calls, shareholder communications, and analyst presentations. Just running the business. As Buffett put it: “Precision Castparts will do better under Berkshire than it would on its own, and it would do very well on its own.”

Lesson From PCC

Excellent management is the most underrated asset. When evaluating a company, look at the people running it. What is their track record? Have they grown the business? Allocated capital intelligently? Acted in shareholders’ best interests?

When you find a CEO who has compounded value for a decade or more, that is someone who knows what they are doing. That kind of management is worth paying a premium for.

Kraft Heinz – Patience Meets Quality

This one is a two-part story. First came the Heinz acquisition, then the merger with Kraft Foods.

Part 1: Buying Heinz

Berkshire Hathaway partnered with 3G Capital Management, a Brazilian private equity firm known for operational expertise in the food industry, to acquire the H.J. Heinz Company. The deal was valued at $23.3 billion, or $72.50 per share. That price represented a 19% premium to Heinz’s all-time high stock price. Including assumed debt, the total value was $28 billion.

At the time, it was the largest deal in food industry history.

The financing was creative. Berkshire and 3G each put in $4.4 billion in equity. JPMorgan Chase and Wells Fargo provided debt financing for the rest. Berkshire also bought $8 billion of Heinz preferred stock paying 9% annual dividends. That preferred stock alone was generating $720 million per year for Berkshire. Before any value creation even happened, Buffett had a massive income stream locked in.

Partnering with an outside firm was unusual for Buffett. But 3G brought deep operational expertise in food that Berkshire did not have. Buffett and Jorge Lemann, one of 3G’s founders, had served together on the Gillette board years earlier. There was trust.

Buffett’s comment was telling: “This is my kind of deal and my kind of partner. I have a file on Heinz that goes back to 1980.”

He had been tracking Heinz for over 30 years before he bought it.

Part 2: The Kraft Merger

On March 25, 2015, Heinz and Kraft Foods announced a definitive merger agreement to create The Kraft Heinz Company – the third largest food and beverage company in North America with about $28 billion in expected revenue.

Kraft shareholders got shares in the combined company plus a special $16.50 per share cash dividend, totaling about $10 billion funded by Berkshire and 3G. After the merger, Heinz shareholders (Berkshire and 3G) owned 51%.

The real appeal was the brand portfolio. Kraft Heinz ended up with eight brands doing over $1 billion in annual sales and five more between $500 million and $1 billion. Household names that people buy week after week. That kind of recurring consumer demand is incredibly valuable.

The Numbers

Berkshire’s cost basis for its Kraft Heinz shares worked out to about $9.8 billion. By the end of 2016, the market value of that stake was $28.4 billion. Nearly three times the purchase price. On a position of 325 million shares, that is serious money.

Lessons From Kraft Heinz

Patience is a real competitive advantage. Buffett kept a file on Heinz since 1980. He waited over three decades for the right opportunity. Most investors cannot sit still for three months, let alone thirty years. But this is how the best investments happen. You study a business, you understand its economics, you know what price makes sense, and then you wait. When the opportunity finally appears – because of a market panic, a willing seller, or a structural change – you already have all the knowledge you need to act fast.

The practical takeaway: build a watchlist of high-quality businesses you would love to own at the right price. Track them. Know what you would pay. Then wait. When circumstances change and the price drops into your range, you will be ready to act with conviction because you have already done the homework.

Sometimes quality is worth a premium. Buffett paid 19% above the all-time high for Heinz. On the surface, that looks like overpaying. But Heinz had just reported its 30th consecutive quarter of top-line revenue growth. It had some of the most recognized food brands on the planet. And Buffett still nearly tripled his money.

The lesson is not that you should overpay for everything. The lesson is that a truly high-quality business with durable competitive advantages, strong brand power, and consistent growth can justify a higher valuation. Paying a fair price for an excellent business beats paying a cheap price for a mediocre one. Every time.

Tying It All Together

These three acquisitions – BNSF, Precision Castparts, and Kraft Heinz – represent Buffett’s evolved strategy. He is no longer the cigar-butt investor who buys beaten-down stocks for pennies. He is buying wonderful businesses at reasonable prices, often taking them private entirely.

But the core principles have not changed. He still looks for durable competitive advantages. He still values excellent management. He still does his homework years (sometimes decades) before he acts. And when he sees an opportunity, he moves fast and decisively.

Whether you are managing $44 billion or $44 thousand, these principles work the same way. Understand the business. Trust good management. Be patient. And when the time comes, do not hesitate.