CNBC Transcript: Warren Buffett Explains His Railroad 'All-In Bet' on America
Just minutes after this morning's announcement that Berkshire Hathaway is paying $26 billion to acquire the 77 percent of Burlington Northern Santa Fe it doesn't already own, Warren Buffett spoke live by phone with Becky Quick and Joe Kernen on CNBC's Squawk Box.
This is the complete transcript of their conversation, that also touched on the economy, executive compensation on Wall Street, and whether capitalism has been "permanently damaged."
BECKY QUICK: First of all, how did this deal come (about)? This comes as a huge surprise to anybody that's been watching this. I know you've had a stake in Burlington Northern, but buying the whole thing that's a huge deal, 34 billion dollars?
WARREN BUFFETT: Well, a week ago Thursday, we were, the Board of Directors of Berkshire was meeting in Fort Worth. We do one off-site meeting a year. We've got three subsidiaries in Fort Worth: Justin Boot, Acme Brick and TTI. So we pick out a place and go down once a year. And I went down a couple of hours early last Thursday, a week ago Thursday. I went over to BNSF and visited with (Burlington Northern CEO) Matt Rose and his top management. They gave me a kind of a run-through of what they were going to do with the analysts that afternoon at 3:30. And I said to Matt, 'If you're ever looking for a permanent home for BNSF, don't forget my phone number. And he didn't throw me out of the office. So the next day while we were touring various businesses of Berkshire, I had my assistant, Debbie Bosanek, call his office and ask if would drop by the Ashton Hotel around six o'clock when we get back. When he dropped by, I made him an offer. He said he would take it to his Board. Took about 15 minutes. (Laughs.)
JOE KERNEN: An offer that he couldn't refuse. You're using stock ...
BUFFETT: I don't like to use stock, but on this one, because of the size and because they wanted a tax-free option for shareholders, we're doing it 40 percent stock and 60 percent cash.
BECKY: What's this 50-for-1 split of the Class B shares? We're just reading this release, too. You don't do stock splits!
BUFFETT: Well, yeah, I'm not big on stock splits. But by having this split, it enables anybody that has as little as one share of BNSF to opt for the tax-free exchange, the 40 percent per share. So those small shareholders can have exactly the same availability that otherwise would only have been available to a big shareholder. Our main exchange will be for 'A' shares. And since the 'A' sells for around $100,000, it means anybody that had less than that amount of BNSF would not have the same choice as a big shareholder did. So, we're not splitting the 'A' but we are splitting the 'B' 50-for-1.
JOE: And, if you had to just -- there's a lot of reasons to love the rails, I know, Warren. But what is it about the future that makes the rails so attractive? We've got to move stuff, I know. Is it that they can do it in a very cost-effective way?
BUFFETT: They do it in a very cost-effective way. And they do it in an extraordinarily environmentally friendly way. BNSF last year moved, on average, it moved a ton of goods 470 miles on one gallon of diesel. It releases far fewer pollutants into the atmosphere. It saves enormously on energy consumption and, you know, it diminishes highway congestion. Rails last year moved 40 percent -- more than 40 percent of the ton-miles in the country. They moved more than all those trucks, just the four big railroads. So it's a very effective way of moving goods. And I just basically believe this country, you know, will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now and the rails should benefit. It's a bet on the country, basically.
BECKY: You know, Warren, you started really getting involved with some of these train stocks, what was it, about two, three years ago when you started buying stakes in Burlington Northern. Was it Union Pacific , the other?
BUFFETT: Yeah, Union Pacific and Norfolk Southern , yeah. About three years ago. I woke up about five years late, but that's pretty good for me. (Laughs.)
BECKY: But what happens to your stakes in these other two?
JOE: He's making a heck of a lot of money on Union Pacific today, I'll tell you that much, Warren. Could you buy them in, too?
BUFFETT: No, no -- (laughs) -- I think --
BUFFETT: I think one railroad's enough. (Laughs.) But --
JOE: So you're saying no, for sure?
BUFFETT: Yeah. No. There's only two big roads in the west and, Union Pacific and BNSF will be competitors 50 years from now. (Laughs.)
BUFFETT: But, it's true. The situation in railroads changed dramatically a decade or so ago. Railroads got much more efficient. I mean, right now you've got 90 percent more ton-miles moving than you had 25 or 30 years ago and you've got 'em moving on 40 percent less track. And the costs have gone done in inflation-adjusted terms. It's become a much more productive industry. But I go way back in it. I went to the Illinois terminal hearings before the ICC 50 years ago. And I used to own something called the Green Bay and Western, and that was the GB&W, and they said it stood for 'grab baggage and walk.' (Laughs.)
BERKSHIRE BUSINESSES DOING 'TICK BETTER'
BECKY: Warren, our guest host today is Governor Ed Rendell from Pennsylvania. He's got a lot of railroads in his state, too.
BUFFETT: Well, good. I hope you originate a lot of traffic that gets transferred to the west. (Laughs.)
BUFFETT: That's a big one.
GOV. RENDELL: Five-state project. Pennsylvania's throwing in 45 million dollars in to match about a 60 million dollar federal investment and a 100 million dollar investment by NS. We're the biggest beneficiary of the Crescent Corridor. It going to create somewhere between a thousand and two-thousand jobs. I'm a great believer in freight rail. We have 67 short lines that connect to our four Class As and it gives us a great competitive advantage. It's an alternative that keeps prices down for goods moving, and that's what this country needs. It is a bet on the country, Mr. Buffett, but I think it's a good bet and we need entrepreneurs to care about this country again.
BUFFETT: You and I are both rail fans. And, you know, it just moves goods so much more efficiently than can be done over the roads. So, over time I think that you'll see more and more ton-miles moving on the railroads.
JOE: You said so. This is your quote. 'An all-in bet on the future of the United States.'
BUFFETT: That's what it is. That's what it is.
JOE: That kind of, I feel like standing up when I say that. (Laughter.)
BUFFETT: Don't sing the Star Spangled Banner, Joe.
KERNEN: No, I do. Because it's you and it's the rails and everything else. Comment quickly on where we are right now, because we always get a snapshot of how you feel. Who knows better about business globally than you? How is Berkshire Hathaway's myriad businesses doing now compared to six months ago?
BUFFETT: Well, they might be doing just a tick better. Fortunately, our two big businesses, insurance and our utility business, aren't really affected that much by the recession. But most of our businesses are still feeling severe effects from the recession. They are not going down. It's stabilized. There's not this fear that was prevalent eight or ten months ago, but business has not bounced very much. It will. I don't know when, but it will. We wouldn't be putting out the equivalent of $34 billion unless I felt there's a lot of good years for America. America's best years lie ahead. There's no question about that.
BECKY: Warren, when we spoke with you, I guess it was about six weeks ago, four or six weeks ago, you had mentioned that you have seen some turns when you look at some of the real estate. Is that still the case?
BUFFETT: Residential real estate has improved. It leveled off, and in most areas -- now, it's a local market. But what really is helping residential real estate, frankly, is that we haven't been building very many houses. And we keep forming households. That stops up the excess inventory. So we're seeing in places like California, we've seen a real stabilization in the lower-end, and the medium-end. Now at the high end, that's not true. But for most housing in the low to medium-price range, I think there's no question that it's stabilized. And that's very important. Commercial real estate is another story.