Takeunders of Publicly Traded Stocks: Assessing The Risk

In 2009, Warren Buffett bought Burlington Northern Santa Fe for a price of $100 per share in a combination of cash and stock (the mix depending upon the election of the Burlington shareholder). In the ten years since that acquisition, Berkshire Hathaway has increased more than three-fold, which is great, but Union Pacific (the closest proxy for Burlington) has increased more than eight-fold. 

Calculating alternative universe scenarios inherently involves speculation, but it is reasonable to project that an investor sitting on $100,000 in Burlington Northern Santa Fe stock in 2009 could have been sitting on $815,000 in BNSF stock today rather than $325,000 in Berkshire Hathaway stock due to the acquisition. 

In 2009, there was a point where Starbucks was trading at $4 per share. If Berkshire or some other well-capitalized entity were to have offered $10 per share to acquire the coffee powerhouse, the nearly ten-fold returns in the past decade could have benefited something other than the initial Starbucks shareholder base. 

This leads to an esoteric investment point: How do you avoid the “take-under” when a potential investment that you own becomes acquired during a recession at a low-ball price that permanently impairs your investment by virtue of its termination at an inadequate value?

My view is that, while take-unders are theoretically a risk facing any company, they tend to involve companies that not only have high debt loads, but have high debt amounts coming due in a short period of time (1-3 years) while the profit base is simultaneously under duress and dealing with the adverse impact of either mismanagement or an unfavorable point in the business cycle. That is the opportunity when a well-capitalized buyer shows up to take over a publicly traded firm.

It is incredibly rare for cash-rich, non-cylical companies to be involved in take-unders because debt amidst simultaneous profit declines are the usual culprits for them. Also, this is an area where past market history can provide you with some useful guidance. If you own a stock in an industry where it dramatically underperforms its industry peers during moments of economic panic, a take-under is possible. Takeunders are small risks in general, but the gravity of the obnoxiousness of owning an asset that cements a loss during a takeover amidst an economic panic is one of the risks inherent in investing.

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