Berkshire’s biggest breakup fees

March 16, 2011, 2:49 PM UTC

Warren Buffett’s company could walk away richer even if the self-proclaimed elephant gunner doesn’t bag his latest target.

Lubrizol (LZ), the Wickliffe, Ohio, industrial lubricants company that agreed Monday to sell itself to Berkshire Hathaway (BRKA) for $9 billion, said in a securities filing Tuesday that it would pay Berkshire a $200 million termination fee if it breaks up the merger for a rival bid.

When breaking up is easy to do

The breakup fee amounts to 2.2% of the equity Berkshire is acquiring – which is toward the low end of the 2%-3% range for termination fees that often prevail in M&A deals, though it is not unusual for Berkshire.

The biggest fee a Berkshire buyout target agreed to was the $400 million that insurer General Re signed up for in the spring of 1998. That fee was actually lower than the Lubrizol fee as a percentage of the deal size, at 1.8% of the $22 billion total. The deal closed that December.

Berkshire would have gotten a $264 million fee had its $26 billion takeover of Burlington Northern been scotched by a rival buyout. That fee, at 1% of equity value, was low partly because no other bidders were on the horizon and partly because Berkshire already owned nearly a quarter of Burlington. That deal closed in February 2010.

One of Buffett’s more profitable deals in recent years was one he didn’t complete.

Berkshire signed up for a $175 million breakup fee when it agreed to bail out Constellation Energy during the financial crisis. That $4.7 billion deal was struck at a huge premium to Constellation’s recent trading price, which made it easy for the power company to find a rival buyer who could afford to pay the fee as well as a superior buyout price.

That was no doubt just as well, as far as Berkshire was concerned. It ended up clearing $1.1 billion on the deal that never was, combining the breakup fee and a $917 million investment gain it made on the deal. Not bad work if you can get it.

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