Why was Warren Buffett willing to use Berkshire Hathaway stock for acquisitions, such as BNSF, instead of cash?

Why does Warren Buffett prefer using Berkshire Hathaway stock over cash when acquiring companies like BNSF?

Based on Warren Buffett’s explanations in his shareholder letters and Berkshire Hathaway’s acquisition practices, the key reasons are analyzed below. Buffett typically prefers cash acquisitions to avoid diluting existing shareholders’ equity. However, in large-scale transactions like the 2009 acquisition of Burlington Northern Santa Fe (BNSF), he opted to partially use stock (approximately 30% of the deal value). This decision was strategic, not arbitrary.

1. Tax Efficiency Advantages

• Beneficial for Sellers: Stock-based acquisitions can qualify as "tax-free reorganizations," allowing target company shareholders (e.g., BNSF shareholders) to defer capital gains taxes. Taxes are only due when they sell Berkshire stock. This makes the deal more attractive to sellers, especially in large mergers, facilitating transaction completion.
• Buffett’s Perspective: In his 2010 shareholder letter, Buffett noted that BNSF’s board insisted on partial stock payment to achieve tax deferral. An all-cash deal would have triggered immediate high tax liabilities for sellers, potentially derailing the transaction. Though reluctant to issue stock, Buffett compromised to close the deal.

2. Preserving Cash Reserves and Optimizing Capital Allocation

• Berkshire holds substantial cash reserves (e.g., tens of billions when acquiring BNSF), but an all-cash purchase (BNSF’s total value was ~$34 billion) would deplete reserves, limiting future investment opportunities.
• Using stock preserves cash for higher-return opportunities or market volatility. Buffett emphasizes that cash is "ammunition for opportunities," particularly valuable in downturns. Issuing stock acts as "equity currency," retaining liquidity.

3. Stock Valuation and Dilution Control

• Advantageous When Undervalued: Buffett repeatedly states in his letters that he only considers issuing stock when Berkshire shares are overvalued to avoid diluting intrinsic value. However, post-2008 financial crisis, Berkshire stock was likely fairly valued or undervalued. Issuing shares then amounted to using "cheap currency" to acquire high-quality assets (e.g., BNSF’s stable cash flow business), benefiting Berkshire shareholders long-term.
• Minimizing Dilution: In the BNSF deal, Buffett issued minimal new shares (~6% of total equity) and executed a stock split (50:1) to ease conversion for BNSF’s small shareholders. This reflects his caution—he views stock issuance as a "last resort," reserved for mega-deals impossible to finance fully with cash.

4. Strategic Synergies and Long-Term Value

• Acquiring "forever assets" like BNSF provides Berkshire with stable income. Using stock turns BNSF shareholders into Berkshire "partners," sharing future growth (e.g., railroad industry recovery).
• Buffett analogized in his letter: It’s like exchanging part of one farm for an adjacent farm to expand the overall estate, rather than selling cash to buy land. Long-term, this strengthens Berkshire’s economic moat.

Key Considerations

• Not a General Preference: Buffett doesn’t always favor stock-based acquisitions (e.g., most small deals use cash). BNSF was an exception due to its scale (Berkshire’s largest acquisition ever) and tax dynamics. Historically, he rarely issues stock; the last similar case was post-Great Depression.
• Philosophical Insight: This reflects Buffett’s investment principles—prioritizing shareholder value and flexibly deploying tools for optimal outcomes. His shareholder letters (especially 2009–2010) offer deeper insights into his M&A rationale.

Through this approach, Buffett ensured the transaction’s success while safeguarding Berkshire’s long-term competitiveness.