Is Buffett contradicting himself?

He doesn't want Kraft to give up undervalued shares for a deal. But that's exactly what his own company is doing.

By Kim Peterson Jan 11, 2010 4:13PM
Credit: (© Paul White/AP)Warren Buffett is unhappy with Kraft (KFT) for trying to buy Cadbury with shares that are undervalued in the market.

So why, then, is Buffett doing the same thing with his purchase of Burlington Northern Santa Fe (BNI), asks Barron's. Good question.

It amounts to what Barron's calls the "Buffett paradox": Do as I say, not as I do.

A quick review: Buffett's Berkshire Hathaway (BRK.A) is Kraft's largest shareholder and as such gets a mighty big say in Kraft's attempts to buy rival Cadbury.

When Kraft proposed issuing up to 370 million shares to help finance the purchase, Berkshire voted no and cautioned all other shareholders to do the same. Kraft shares are undervalued at $27 a piece (now nearly $29) and shouldn't be used to help buy Cadbury.

But Berkshire is issuing $10 billion in shares of its stock to help buy Burlington Northern, Barron's points out.

And there's no denying that Berkshire is undervalued. The stock is at just 1.2 times the magazine's estimate of year-end 2009 book value of $84,500 a share. Historically, Berkshire comes in at about 1.65 times book value.

In other words, the stock is cheap.

"Buffett appears to be giving up a piece of a very cheap company to buy one that is fairly priced. He is not so happy when his investment companies do the same thing," one Berkshire shareholder told Barron's.

It just shows me how bullish Buffett is on the future of Burlington Northern. He's making a big bet on the company, spending valuable stock on a deal that didn't come cheap.

Related reading:

Warren Buffett takes on Kraft

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