Buffett Knows When to Break His Rules - TheStreet



) -- Sometimes, even Warren Buffett breaks his own rules.

As he has explained in the past, Buffett has traditionally been opposed to his investment companies issuing new shares of company stock to fund debt or participate in mergers and acquisitions. Additionally, the investor has said he does not believe in stock splits, claiming that the action simply cuts one pie into more pieces.

His disapproval stems from the fact that these actions can come with side effects that are detrimental for shareholders. By flooding the market with additional shares, the value of the stock can take a hit and shareholder power is diluted.

Recently his feelings on this topic surfaced when Buffett attempted to use his authority to extinguish



's most recent $17 billion hostile takeover bid for




In order to fund the bid, Kraft officials hoped to receive shareholder approval to issue 370 million additional shares of KFT. The Oracle criticized the planned offer, warning CEO Irene Rosenfeld and shareholders to avoid overpaying for the U.K. candy maker.

Buffett, Kraft's largest shareholder with more than 9% of the company's stock, would suffer a big loss if the shares plummet.

Interestingly, though Buffett has made it clear that he is opposed to any offer presented by Kraft which includes the excessive use of company stock, he appears to be singing a different tune when it comes to his own multi-billion dollar acquisition of

Burlington Northern Santa Fe



In this case, the Oracle plans to issue $10 billion in Berkshire stock to help pay for the $34 billion railroad purchase. Buffett hopes to reach this goal by receiving shareholder approval for a 50-for-1 stock split of

Berkshire Hathaway Class B Shares

(BRK.B) - Get Report

as well as receive the approval to increase the number of authorized Berkshire shares. Berkshire shareholders are slated to vote on this issue on Jan. 20.

Buffett's plan to take this type of action comes at an interesting time. Although the investor has made a career of beating the broad market with his plays, in 2009 he had his worst performance in a decade. Although the year was marked by impressive bets and profits from playing including

Goldman Sachs

(GS) - Get Report

and BYD, Berkshire shares only saw a 3% increase. By contrast the S&P gained 23%.

By issuing new shares, Buffett is essentially giving the go-ahead to further hinder the performance of Berkshire Hathaway shares heading into 2010.

However, as usual, Buffett does not appear to be interested in the short-term implications of the deal. Rather, this set up appears to better position Buffett and Berkshire to benefit for years to come.



points out, the 50-for-1 share split in Berkshire B Class Shares will bring the price of the firm's stock down to a more retail investor friendly level and could ultimately lead to the firm's addition to the S&P 500. In this event, a spike caused by investors hoping to hop on the Buffett band wagon could possibly offset any losses caused by the initial influx of shares.

Additionally, by using Berkshire stock to pay for the deal, Buffett has explained that the company will be left with $20 billion in cash that can be used to fund future Berkshire acquisitions.

In the end, although his feelings concerning the use stock splits and using company shares to pay for deals are strong, his No. 1 rule remains "don't lose money." In the case of Berkshire's purchase of BNI, he appears to be breaking his rules in the short-term to profit in the long term. While a hit may be taken initially, Buffett's firm still looks to be strong in the future.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion did not hold any of the stocks mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.