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By Brett Horn, CFA | 04-27-2010 10:58 AM

Is Burlington a Game-Changer for Berkshire?

Morningstar's Bill Bergman comments on Berkshire's current penchant for capital-intensive businesses and the outlook for its operating companies.

Brett Horn: Hello. I'm Brett Horn, the associate director of equity research here at Morningstar. We've got Berkshire Hathaway's annual income up this weekend. So, I invited Bill Bergman, our analyst who covers Berkshire for us, in to talk about what we might expect to hear from them.

Thanks for joining us.

Bill Bergman: Hi, Brett. Nice to be here.

Horn: We talked about a couple of topics. One topic I'd like to hit is this operational hits. Buffett draws a lot of press for his trades and his investments, but Berkshire Hathaway is a large operating company. They have got a lot of businesses that are some very exotic, some very pedestrian.

One thing in reading his letter this year, I was actually surprised to hear was, he was talking about how they're actually attracted to capital-intensive businesses at this point. Now, given our philosophy, that maybe raises a little bit of a flag. All else equal, as capital goes up, ROICs come down, returns to shareholders and value creation would come down.

Is that something you're worried about?

Bergman: Well, I don't know if "worried" is the right word, Brett. But, it is something that is a reality, I think, for Berkshire at this stage in its development.

It has a long history of acquiring firms at a relatively good price, and compounding returns over time for shareholders of Berkshire in ways that haven't been replicated elsewhere in our corporate universe.

But having said that, yes, the size of the firm and its cash position, as well as it capital structure, are making the firm more attractive as a merger partner for capital-intensive businesses. This was exhibited by the Burlington Northern acquisition.

One attraction for the Burlington Northern acquisition for Berkshire shareholders, as well as Burlington Northern, may be the have a capital intensive business in the form of Berkshire within Burlington Northern. But you have a low-cost of capital at Berkshire Hathaway in ways that it may be good for both entities.

Horn: Is Burlington really a game-changer for Berkshire? Is it just one more business under the umbrella? Or how do you view that?

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