Nov. 6 (Bloomberg) -- Warren Buffett is giving arbitrage traders the chance to capture annualized earnings of 22 percent on his bid for Burlington Northern Santa Fe Corp.

Berkshire Hathaway Inc. offered $100 a share for the largest U.S. railroad on Nov. 3 in a deal the Omaha, Nebraska- based insurance and investment company said would probably close during the first quarter. Based on that schedule and Burlington’s closing price of $96.98 yesterday, the acquisition offers an annualized return of 8 percent to 22 percent.

Shares of takeover targets rise to the offer price as the closing of the deal nears, with the gap widening when there’s doubt it will be completed. Berkshire is already Burlington’s biggest shareholder. Potential profits on the bid exceed the 0.08 percent annualized return during the past week from the 100 largest taxable U.S. money-market funds, according to data compiled by Westborough, Massachusetts-based Crane Data LLC.

“It’s a good opportunity to put some cash to work and at the end to get some Berkshire shares as part of the transaction,” Anne Gudefin, whose $15.1 billion Mutual Global Discovery Fund holds Berkshire stock and beat 99 percent of peers the past five years, said in an interview at a Franklin Templeton Investments conference in Vienna yesterday.

Low Breakup Fee

Berkshire, run by Chairman and Chief Executive Officer Buffett, said on Nov. 3 that it will use cash and stock to purchase the 77.4 percent of Fort Worth, Texas-based Burlington that it doesn’t already own. Berkshire accepted a lower-than- usual breakup fee in a sign Buffett expects no one will top his bid, according to Elizabeth Nowicki, a professor at Tulane University Law School and a former mergers and acquisitions lawyer at New York-based Sullivan & Cromwell LLP.

Gudefin, who is based in London, said merger arbitrage will probably become a larger component of her strategies after investors pulled money last year from hedge funds that focus on it, increasing potential returns. Merger arbitragers profit from the difference between the price of a takeover target and the value of the buyer’s offer.

Takeovers will pick up this year because stocks trade at “reasonable” valuations, banks are more willing to finance deals and companies are seeking to boost growth because of the “subdued” economy, she said.

“There are a lot of things that make acquisitions attractive and therefore merger arbitrage attractive,” Gudefin said.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: November 6, 2009 09:01 EST