Berkshire Hathaway Inc., the holding company that agreed to buy Burlington Northern Santa Fe Corp., accepted a lower-than-usual breakup fee in a sign Warren Buffett expects to complete his biggest takeover.

Berkshire will receive $264 million if Burlington, the biggest U.S. railroad, cancels the agreement, according to a filing yesterday. That’s less than 1 percent of the deal’s value including net debt and compares with the 2 percent to 3 percent that is typical of these deals, said Elizabeth Nowicki, a professor at Tulane University Law School.
“Berkshire recognizes there’s a very, very small chance Burlington is going to have the desire or the opportunity to back out,” Nowicki, who is a former mergers and acquisitions lawyer at New York-based Sullivan & Cromwell LLP, said in an interview. “In this difficult economy, I doubt the Burlington board is going to have other bidders wanting to acquire them.”
Buffett, who built Berkshire over more than four decades, is taking on debt and spending the company’s cash as the economic crisis curbs expansion at some U.S. firms. Berkshire agreed to pay $26 billion for the 77.4 percent of Fort Worth, Texas-based Burlington it didn’t already own and assume $10 billion in net debt.
“I don’t think anyone has the firepower to do this deal” besides Berkshire, said Paul Howard, an analyst with Janney Montgomery Scott LLC’s Langen McAlenney division in Hartford, Connecticut. “Maybe a foreign entity, but the U.S. government is not going to let that happen.”
The two non-governmental takeovers this year bigger than Burlington’s included termination fees of 3.1 percent and 2.6 percent. Pfizer Inc.’s $64 billion agreement to purchase Wyeth carried a termination fee of as much as $2 billion, and Schering-Plough Corp. would pay Merck & Co. $1.25 billion if it backed out of their $47 billion deal.
Buffett, Berkshire’s chief executive officer, didn’t respond to a request for comment left with his assistant Carrie Kizer. Law firm Cravath Swaine & Moore LLP advised Burlington, and Munger Tolles & Olson LLP was Berkshire’s legal adviser.
The Burlington agreement gives Buffett the “elephant”- sized acquisition he said he’s been looking for to deploy accumulated earnings from Berkshire’s insurance units and investments. It marks a shift from Buffett’s strategy in the recession of drawing down Omaha, Nebraska-based Berkshire’s cash hoard, valued at more than $24 billion at the end of June, to finance firms including Goldman Sachs Group Inc. and Harley- Davidson Inc. whose funding costs rose last year.
Buffett’s Burlington purchase “is a much more traditional deal than his extracting a pound of flesh for liquidity” in the financing deals, said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site. “He buys a traditional business and holds it forever.”
Buffett, the world’s most celebrated investor, bought General Reinsurance Corp. in 1998 for more than $17 billion and expanded into power production with the purchase of MidAmerican Energy Holdings Co. Last year, he bought Marmon Holdings Inc., a collection of more than 100 businesses, from the Pritzker family. Berkshire previously purchased car insurer Geico Corp. and luxury plane-leaser NetJets Inc.
Burlington was profitable every quarter for at least a decade and remains shielded from competition by its rail network. Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages.
The railroad, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second- largest operating unit by sales. Berkshire’s McLane unit, which delivers food to stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008. Berkshire’s largest business overall is insurance.
(Source: Bloomberg)