Zacks_Analysts' Blog : Berkshire to List on S&P 500 - Analyst Blog

Yesterday, Standard and Poor’s (S&P) announced that it will be adding Berkshire Hathaway (BRK.A, BRK.B) in place of Burlington Northern Santa Fe Corp. (BNI) in its S&P 500 index. This move by S&P comes after Berkshire last week announced a 50-for-1 split of its Class B shares in connection with the conglomerate's takeover of Burlington Northern.

Warren Buffet, the CEO of Berkshire Hathaway, has to date not considered a splitting of any of its Class A or Class B shares. This refusal to split the stock reflects management's desire to attract long-term investors as opposed to short-term speculators.

This share-split action is intended to compensate the holders of lower amounts of Burlington shares. Since the Class A shares are too high priced, it would be difficult to use these to compensate the low-value shareholders in the acquired company. However, the split of the shares into the high-priced Class A and the lower-priced Class B will provide appropriate currencies for compensating both categories.

Thus shareholders who do not hold a high value of stock but opt for exchange may now be compensated with only Class B shares. The majority of the shares issued in the $100-per-share deal will, however, be Class A shares.

The share split-off and its eventual inclusion in the S&P 500 index will attract smaller investors to buy into the once high-priced stock, boosting its demand and thereby increasing liquidity. On the negative side, it might also attract such investors that Buffet was apprehensive about.

The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. It is formed by companies representative of the industries in the United States economy. Though Berkshire Hathaway had a larger market capitalization than nearly all the members of the S&P 500, it had to date been excluded due to its extremely high stock price (over $100,000 as of January 2010), rendering the stock “illiquid," or difficult to trade.

For Berkshire, the acquisition of Burlington Northern, in which it had already owned 22.6%, will be the biggest to date. With this acquisition, Berkshire is adding a railroad transportation business to its already wide scope of manufacturing, retail, insurance and utility businesses. Valued at $34 billion, the acquisition is expected to close in Feb 2010, post the shareholders’ approval.

Following the announcement, Berkshire A shares jumped 8.2% to $73.61 in after-hours trading on Tuesday, and are currently up 4.7% as of mid-day Wednesday.