Warren Buffett saw an opportunity to put some of his cash to work in early 2022, shortly after Microsoft(NASDAQ: MSFT) announced a deal to purchase Activision Blizzard. Now, he's getting his payout.
Earlier this month, Microsoft paid $95 per share to each shareholder of Activision Blizzard. As of the end of the second quarter, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) had 14,658,121 shares of the video game maker. That's good for a payout of nearly $1.4 billion.
Here's how Buffett managed Berkshire's position in Activision leading up to the acquisition, and what he's most likely to do with the fresh cash.
A classic Buffett investment
Activision might not sound like the type of stock Warren Buffett buys. But, in fact, he's been buying stocks like Activision for more than 50 years.
Berkshire Hathaway first bought shares of Activision in late 2021, before the merger announcement. One of Berkshire's independent portfolio managers, Ted Weschler or Todd Combs, was responsible for purchases in October and November of that year.
However, Buffett was responsible for adding to the position after the merger announcement. The play was classic merger arbitrage. Investors can make arbitrage investments by buying company shares below the agreed-upon acquisition price. Buffett has been putting his money to work in arbitrage plays for years.
In his 1988 letter to shareholders, he wrote: "We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas. At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments."
Despite Microsoft's offer of $95 per share for Activision, the stock traded for less than $80 for most of 2022. That means there was more than 20% upside if the acquisition closed successfully.
Microsoft originally anticipated the acquisition to close by June 30, 2023, which would mean an annualized return of about 13%. That's a far better return than Treasury bills offer. Even if Buffett gave Microsoft a less than 100% chance of closing the deal, or closing the deal on its original timeline, there's plenty of margin of safety in that equation.
Buffett sold most of his position early
An interesting difference between this arbitrage play and past Buffett arbitrage is that Berkshire sold most of its position before the deal went through.
After building a 9.5% stake in Activision in early 2022, Berkshire sold a significant portion by the end of the year. At that time, it held just 6.7% of the company. It's very likely Buffett didn't make any profit on the sale of those shares.
He sold more in 2023, roughly 72% of his remaining stake. Shares spiked in March this year after it looked likely E.U. regulators would approve the deal. Perhaps Buffett took a small slice off the table at that point. He sold a much bigger portion of shares in the second quarter, when he still had a chance to capture a price in the mid-80s.
Buffett might have seen better uses for the cash than waiting for Microsoft to close the deal. Or maybe the regulatory pressure made him rethink the odds of the deal closing. He left hundreds of millions of dollars on the table by selling out early, but he has made several good investments in Berkshire's portfolio in the meantime.
What will Buffett do with his $1.4 billion payout?
While there's no telling exactly what Buffett will do with his fresh cash, there's one thing he has consistently done with the cash generated by his portfolio and the rest of Berkshire's operations for the last 20 quarters in a row: He has bought back shares of Berkshire Hathaway.
The board previously had a rule requiring shares to trade below 120% of book value. But that rule went by the wayside in 2018 after years of the stock consistently trading above that valuation. Since the rule change, Buffett has bought back shares of his own company every single quarter.
Shares currently trade at a price under 140% of book value, which is by no means a bargain, but still presents a fair price. With new cash coming in from his Activision shares, Buffett wouldn't be out of line to buy back more shares of Berkshire.
Fundamentally, share buybacks increase the value of each remaining share outstanding, meaning shareholders will receive a greater piece of the future earnings of the company. That's represented as earnings per share in quarterly reports, and it makes Berkshire shares more appealing from a price-to-earnings perspective. Investors who favor Buffett's value-investing approach could do well buying the stock of his company itself.
We'll have to wait until February to see exactly how Buffett's portfolio is changing this month, but there's a good chance he is putting cash to work by consistently buying back shares of Berkshire Hathaway.
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