Commentary: Berkshire Hathaway Takes the Easy Money in IBM-Red Hat Merger

(BRK.A), (BRK.B)

In life there’s hard money and there’s easy money. There are times when you work day and night and have little to show for it, and there are times when the money falls like leaves from a tree.

One thing about Berkshire Hathaway, they’re never afraid to make money the easy way.

And what could be easier than with a click of a mouse buying up shares that somebody’s already committed to paying more for?!

With IBM set to buy Red Hat Software for $34 billion, Berkshire Hathaway has been busy buying up shares for what looks to be a profitable merger arbitrage play.

IBM’s move is the third-biggest U.S. technology merger history, trailing only Dell’s acquisition of EMC, and the JDS Uniphase acquisition of SDL, and Berkshire has jumped in and scarfed up 4,175,792 shares of Red Hat at an average price of $175.64 per share, it just revealed in its latest 13F filing for Q4 2018.

The shares represent 2.3730% of the software and cloud computing company, and if the deal goes through, Berkshire will make a profit of 7.55% for just buying and holding until the closing date.

The deal is expected to close in late 2019.

Berkshire does not disclose who makes a particular stock purchase or sale, so it’s not known whether the move is the handiwork of Warren Buffett, or his portfolio managers Todd Combs and Ted Weschler.

Combs and Weschler each handle separate portfolios of roughly $10 billion each, which combined is just over 10% of Berkshire’s diverse $183 billion portfolio of shares in companies such as Apple, Coca Cola, Bank of America, Wells Fargo, American Express, JP Morgan Chase, Delta, Goldman Sachs, and Southwest Airlines, among others.

IBM hopes its acquisition of Red Hat will provide an open approach to cloud computing, and make IBM the #1 hybrid cloud provider in an emerging $1 trillion growth market. It plans for Red Hat to operate as a distinct unit within IBM’s Hybrid Cloud team.

We Don’t Care. We Don’t Have To

However Red Hat operates, it won’t matter to Berkshire.

Berkshire previously dumped all its IBM shares when it lost hope in IBM’s growth plans after company racked up almost six years of declining sales.

Unlike IBM, Red Hat has seen dramatic revenue growth. Its revenue shot up 21% between the 2017 and 2018 fiscal years.

However, IBM’s offer to pay $190 a share for Red Hat has Berkshire excited if not for IBM, than at least for the billions it will pay for Red Hat.

IBM is swinging for the fences with its largest acquisition in its history. And Berkshire is more than happy to hit a nice clean single of its own.

© 2019 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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