Category Archives: Commentary

Commentary: Think Berkshire Hathaway Is Diversified? You Don’t Know The Half Of It

(BRK.A), (BRK.B)

“Where can I find a list of Berkshire Hathaway’s companies?” It is a frequent question.

As someone that spends a good bit of time writing about Berkshire Hathaway’s companies, I can tell you that I’ve never seen a consolidated list of all of Berkshire’s wholly-owned companies. (This is distinct from the companies like Amex, or Coca-Cola that are in Berkshire’s stock portfolio.) Yes, there is a list of companies on Berkshire’s website, but it does not truly give you the picture of all the company that the conglomerate owns.
Why?

First, because Berkshire not only owns a lot a stand-alone companies, some of which everyone knows (BNSF, GEICO, NetJets, Dairy Queen), and others that are far less familiar (Mouser Electronics, Berkshire Hathaway E-Supply) but they also own other holding companies, such as Marmon Holdings, Richline Group, IMC International Metalworking Companies, and Scott Fetzer.

Marmon, for example, owns over 100 manufacturing companies. These are not little mom and pop shops, but major manufacturing companies in their own right. For example, Marmon owns Cornelius, the billion dollar worldwide leader in beverage dispensers. Go into a fast food restaurant, hotel breakfast bar, or gas station that has a fill-a-cup dispenser and it likely says Cornelius.

And second, because so many of Berkshire’s companies own other companies.

You may have heard of Richline Group, but have you heard of DRL Manufacturing S.A., located in San Pedro, Dominican Republic? It’s a jewelry manufacturing company with 800 employees.

Or take a look at McLane Company. In 2012, McLane acquired Meadowbrook Meat Company (a $6 billion foodservice distributor with 3,300 employees.) But that’s just the tip of the iceberg. Some of Berkshire’s companies’ companies own companies. Yes, that’s not a typo.

Speaking of McLane Company, McLane owns wine and spirits distributor Empire Brands, and Empire Brands acquired Horizon Wine & Spirits Inc. So, Berkshire owns McLane, which owns Empire Brands, which owns Horizon.

You can call them divisions or subsidiaries, but they were often stand-alone businesses when they were acquired by one of Berkshire’s companies.

Let me give you one more example of this. Berkshire owns Fruit of the Loom, and mentions them in the annual report. However, that’s just the start for understanding what Berkshire owns with Fruit of the Loom.

In 2006, Fruit of the Loom acquired Russell Brands. At the time, Russell Brands owned Russell Athletic, Brooks Running, and Spalding, among other brands. So, when you see a Spalding basketball, you are actually seeing a product of a wholly-owned Berkshire company, even though when you go to the bottom of the Spalding website it just mentions Russell Brands, LLC.

While much of the press focus with Berkshire Hathaway is whether or not Warren Buffett has acquired an “elephant” (a giant-sized acquisition), yet every year Berkshire spends billions acquiring more companies through bolt-on acquisitions to its existing companies.

This is a very wise approach, as Berkshire’s managers know what is additive to their companies. And, if Buffett agrees that this is a good use of capital, they strengthen their respective companies through acquisitions.

Note to Berkshire shareholders, this is why the Berkshire you own now is even better than the Berkshire you owned ten years ago. Its companies have continued to make meaningful acquisitions that expand their operations.

Take Clayton Homes, the leader in mobile, modular and manufactured homes. In 2016 Clayton acquired Goodall Homes, in 2018 they acquired Arbor Homes (Indianapolis’s largest home builder), and in 2019 they acquired Highland Homes. So, now Clayton is not only the leader in mobile homes, but also a growing player in site-built homes, as well.

Sometimes the acquisitions are phased in. Right now, Berkshire is a minority owner of Pilot Company, the leading supplier of fuel and the largest operator of travel centers in North America. In 2020, Berkshire will become the majority owner, and whenever you stop at a Pilot Travel Center, Pilot Food Mart, or a Flying J gas station, you will be at a Berkshire Hathaway company. But even that won’t tell you the full story on Pilot, as Pilot acquired Equipment Transport, LLC, a wellsite services company, and also runs the fourth-largest tanker fleet in the U.S.

Berkshire and its companies are like a giant nesting doll. Open one and there is often another inside.

The point of all this is that Berkshire Hathaway is not just diversified, it is really, really diversified.

© 2020 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 a 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.

Commentary: Buffett Casts His Vote with Dominion Energy Assets Acquisition

(BRK.A), (BRK.B)

With Berkshire Hathaway’s $9.7 billion agreement to acquire Dominion Energy’s natural gas transmission and storage business, Warren Buffett has engaged in a strategy that is familiar to Buffet watchers—the choice between owning a part of a company through equities, or the acquisition of whole companies. It’s a choice that Buffett that has made for almost six decades based on which valuation he judges to be cheaper.

At this year’s annual meeting, Buffett revealed that he had bought relatively few stocks at a time when the market’s plunge had many seeing a rare buying opportunity. Buffett thought differently, and his sale of Berkshire’s entire commercial airline portfolio due to what he felt would be long term profitability issues for United, Delta, American, and Southwest, reflected that perspective.

Now, Buffett has found something he likes. It is an acquisition that makes Berkshire Hathaway a giant in natural gas distribution, vaulting it from carrying 8% of the nation’s natural gas to 18%.

The acquisition adds to one of Berkshire’s core businesses, Berkshire Hathaway Energy, which will acquire 100% of Dominion Energy Transmission, Questar Pipeline and Carolina Gas Transmission; and 50% of Iroquois Gas Transmission System. Additionally, Berkshire will acquire 25% of Cove Point LNG – an LNG export, import and storage facility in Maryland.

The acquisition includes over 7,700 miles of natural gas transmission lines, with approximately 20.8 billion cubic feet per day of transportation capacity and 900 billion cubic feet of operated natural gas storage with 364 billion cubic feet of company-owned working storage capacity, and partial ownership of a liquefied natural gas export, import and storage facility.

Demand for natural gas has risen from 4,917,152 million cubic feet in 1949 to 31,014,345 million cubic feet in 2019, according to the U.S. Energy Information Administration. And with the retirement of more and more coal-fired generating plants, natural gas is a key replacement. Even with the enormous growth of wind and solar, new gas-fired plants are being constructed as backup generation for when the winds are calm and the skies are cloudy.

By making this acquisition, Buffett adds key assets to Berkshire Hathaway Energy that will guarantee a pay-off not just in the short term, but for decades to come. And that’s exactly what Buffet likes, putting money to work for decades to come.

This is not to say that Buffett won’t return to buying equities, but for now, he has voted with his dollars that the better deal in the near term is the acquisition of a whole company.

© 2020 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 a 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.

Commentary: Buffett Affirms Berkshire’s 3 Pillars Stand Strong

(BRK.A), (BRK.B)

Berkshire Hathaway is so diversified that it’s impossible for it not to be impacted adversely by COVID-19. Automobile retailing through its Berkshire Hathaway Automotive network of dealerships, furniture retailing (Nebraska Furniture Mart, Jordan’s, Star Furniture, RC Willey Home Furnishings), and the See’s Candies retail stores, are just a few of its companies that are facing slumping revenues.

At the Berkshire Hathaway annual meeting held on May 2, Warren Buffett noted that the swift temporary closure of See’s retail stores in late-March left it with a huge inventory of Easter candy that will go unsold.

“…we were in the midst of our Easter season and Easter is a big sales period for See’s. And I don’t know whether we were halfway through, but we weren’t halfway through in terms of the volume is going to be delivered because it comes toward the end. And essentially we were shut down and we remain shut down. The malls that we’ve got 220 or so retail stores and we’ve got a lot of, Furniture Mart sells our candy. But the Furniture Mart’s closed down. And so See’s business stopped and it’s a very seasonal business to start with. So we have a lot of seasonal workers too that come in, particularly for the Christmas season. But we have a lot Easter candy, and Easter candy is kind of specialized too. So we won’t sell it. And we produced a good bit of it.”

Getting Nervous? Don’t Be

However, amidst the bad news was a key point that Buffett emphasized. The three main pillars of Berkshire Hathaway—its insurance, freight railroad, and energy business, are all strong and will continue to generate cash.

“Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position,” Buffett explained. “They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets. But basically these businesses will produce cash even though their earnings decline somewhat.”

Berkshire’s businesses are so strong because planning for the worst case scenario is at the heart of Buffett’s philosophy. Buffett explained that they even plan for more than one disaster.

“I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.”

And if that’s not enough to reassure you, don’t forget that Berkshire has $137 billion in cash.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway and BYD, and this article is not a recommendation on whether to buy or sell a 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.

Commentary: Buffett’s Cash Pile Not a Source of Ridicule Anymore

(BRK.A), (BRK.B)

Up until a few weeks ago, Berkshire Hathaway’s enormous pile of cash, which had reached $125 billion, and was growing $1.5 billion a month, was taken by many as a sign of failure on the part of Warren Buffett.

Increasing cries for a dividend, or increased buybacks (despite the stock sitting at or near record highs) was just some of the popular chatter.

What a difference a few weeks makes.

With the markets experiencing extreme volatility, and many businesses forced to close or facing plummeting demand, Buffett’s patience finally looks like it has met conditions where his value investing strategies can excel.

As share prices fall, Buffett clearly has the chance to use his elephant gun to bag his elephant, as he likes to call the acquisition of a major company, which is something he hasn’t done since acquiring Precision Castparts in 2016.

The opportunities are many, as valuations have retreated so significantly that Berkshire now holds more cash than the market valuations of more than 450 companies in the S&P 500, over 80 in the Nasdaq 100, and 11 that make up the Dow 30.

In addition to acquiring his elephant or two, Buffett will certainly have opportunities to help companies shore up their balance sheets through his favorite method—receiving preferred stock that pays generous interest, and receiving warrants for common stock purchases.

The latter, as in the case of his rescue of Bank of America during the Great Recession, pays off handsomely once the economy and stock prices have recovered. As proof, Berkshire now owns just over 9.9% of the bank.

It will be interesting to see what strategies Buffett employs, and whether there are more opportunities in the purchase of whole companies, or in grabbing generous chunks of a wide range of companies. He might even increase his buyback of Berkshire stock, because owning more of one of the world’s healthiest and diversified conglomerates makes sense at these prices.

Perhaps investors big and small should do the same, as Berkshire’s P/E ratio of sat at only 5.38 as of Friday, March 27.

Let’s not forget that in addition to being poised for Berkshire’s expansion while others are contracting, Buffett has also insured the short term and long term health of Berkshire itself. He has always held $20-$25 billion in reserve for the conglomerates own needs during the worst of times.

These might be the worst of times for some, but for Buffett, who famously said in his 1986 Letter to Shareholders, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” these are the best of times to invest.

In a couple of months, Berkshire’s next 13F filing will reveal just how much stock he and his trust lieutenants Todd Combs and Ted Weschler have acquired, and we may know even sooner if an elephant comes within range.

It will be interesting to see how greedy Buffett gets.

© 2020 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.

Commentary: Buffett’s Got the Inside Numbers on Softening Consumer Demand

(BRK.A), (BRK.B)

Warren Buffett probably knows the current state of the economy better than anyone else in the United States. After all, at any moment he knows how cars are selling at Berkshire Hathaway Automotive, how homes are selling at Berkshire Hathaway Home Services, and how much goods and commodities are shipping at BNSF Railway.

BNSF Railway’s total carloads for 2019 are in a downward trend as compared to 2018 due to a major decrease in intermodal shipping, which is down 5.53% from 2018.

And we already know from Ford’s and General Motors’ earning reports that car sales fell in the second quarter.

Buffett also knows that consumer demand for furniture and home goods continues to soften, as the numbers at his retailers: Nebraska Furniture Mart, Jordan’s Furniture, RC Willey, and Star Furniture show.

In its latest SEC filing, Berkshire Hathaway reported that its sales and earnings from its furniture business were down 3% from the same period in 2018.

“Soft consumer demand,” along with poor weather in parts of the country, were the reasons cited.

Berkshire’s pre-tax earnings for home furnishings for the first six months fell a dramatic 23%, due to higher operating costs and lower sales.

Home furnishings, which include furniture, appliances, rugs, table and chairs, and other home décor, decline in sales when consumers cut back on discretionary spending, delay upgrading, and avoid adding large purchases, as their consumer debt grows.

Berkshire’s Jordan’s Furniture, which is the leading furniture retailer in New England, is already offering 72-month interest free financing in order to prop up sales.

Strong consumer demand, which has long propped up the economy, and kept the longest economic expansion in U.S. history chugging along, may finally be weakening. And Warren Buffett certainly knows it better than anyone.

© 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.

Commentary: Berkshire Finally Has Smooth Driving in Texas

(BRK.A), (BRK.B)

Berkshire Hathaway, a company that does a Texas-sized amount of business in Texas, including being the home state for BNSF Railway, had an unexpected bump in the road created by its 2015 acquisition of the Van Tuyl Group.

Berkshire bought the auto dealership group for $4.1 billion after company CEO Larry Van Tuyl approached Berkshire in late-2014 and proposed the acquisition.

Unfortunately for Berkshire, Texas state law prohibited owning dealerships if you manufacture vehicles, something Berkshire does through its wholly-owned Forest River, Inc., a leading manufacturer of RVs and small buses.

Van Tuyl Group, which was rechristened Berkshire Hathaway Automotive, ran afoul of the Texas Department of Motor Vehicles when in 2017 the Department decided to look at whether Berkshire Hathaway was violating state law and might be subject to fines.

Berkshire Hathaway Automotive CEO Jeff Rachor testified before State Sen. Kelly Hancock’s committee that applying the law to auto dealerships because of owning a motorhome manufacturer was an “unintended consequence.”

Unfortunately, Texas regulators didn’t relent and Berkshire’s first push at a legislative fix, which included some glad-handing by Warren Buffet himself, came up empty when the Tea Party coalition helped kill a bill to fix the problem.

Fast forward a couple of years and cooler heads have prevailed.

This time, the bill State Sen. Hancock sponsored, SB 1415, passed, and Gov. Greg Abbott has signed it into law.

The new law, which takes effect Sept. 1, 2019, means that manufacturers are now only prohibited from owning dealerships that sell the same vehicles that they produce, which is not something that Berkshire Hathaway Automotive Group does.

Problem solved, and Warren Buffet can now breath a Texas-sized sigh of relief.

© 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.

Commentary: Has the Time Finally Come for Berkshire to Cash Out of Axalta?

(BRK.A), (BRK.B)

Has the time finally come for Berkshire Hathaway to cash out of its minority position in Axalta?

Back in 2015, Berkshire Hathaway acquired roughly 10% minority stake in Axalta Coating Systems from The Carlyle Group for $560 million, or $28.00 per share. Axalta is a leading global coatings provider for vehicles and industrial applications.

Since that time it’s watched its investment flounder, as the Philadelphia-based Axalta fought off being acquired by PPG, and spurned another potential merger with Dutch coatings company Akzo Nobel.

Nippon Paint was another company that was interested in Axalta, only to have the company reject a $9.1 billion all-cash bid that it made near the end of 2017.

2017 was also a year of internal turmoil for the company. Axalta parted ways with its newly hired CEO, Terrence Hahn, after only five weeks on the job. The dismissal came after an internal investigation turned up conduct that Axalta “believes was inconsistent with company policies.”

Chief financial officer Robert Bryant took over as CEO and remains in that position today.

Apparently, Axalta was a company unwilling to be taken over by anyone.

Now, Axalta finally seems ready to enhance shareholder value, and a takeover has become more likely.

“Axalta’s Board is committed to maximizing value for all shareholders and has initiated a comprehensive review of strategic alternatives, including a potential sale of the Company, changes in capital allocation, and ongoing execution of our strategic plan,” according to Axalta director Mark Garrett.

With a sale of the company finally on its board’s agenda, could this be the time for Buffett to finally get something for his investment?

Nippon Paint, PPG, and Akzo Nobel are all among the potential players, and the market has quickly recognized that this time may finally be different for Axalta.

Axalta (AXTA) closed on Friday at $29.99, making Berkshire’s stake worth $727,677,360. And it’s now trading above its 52-week high of $30.94 in Friday’s after-hours trading.

Hopefully there’s more good news to come.

Finally.

© 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.

Commentary: Race Between Tesla and BYD Not Going Well for Tesla

(BRK.A), (BRK.B)

If there ever were two companies on a collision course for investors dollars it’s Tesla and China’s BYD (Build Your Dreams), a world leader and pioneer in battery and zero-emission vehicles.

Both companies have staked their claim as the leaders in the electrification of everything from cars to forklifts, and both companies have intrigued investors looking for explosive growth on the manufacturing side of investing.

Unfortunately, for Tesla, which lost $702 million in its first quarter and is already looking towards another capital raise in the $2.5 billion range to keep the battery-powered lights on, its overseas competitor is making money.

Lots of money.

BYD has announced that its first quarter profit skyrocketed 632 percent to 749.73 million yuan (US$111.4 million).

In the race to become number one in electric cars, BYD’s already firmly in the lead.

While US investors may pay more attention to Tesla’s US sale figures (increasingly nervously), BYD is number one in the biggest electric vehicle market in the world, China.

“New energy vehicles are expected to continue to sell well in the second quarter, and new energy vehicle sales and revenues continue to maintain strong growth,” noted BYD in its stock exchange filing.

BYD is looking even further down the road, and just signed an agreement with the city government of Changzhou city government for its fourth car factory, which will produce some 400,000 electric cars annually.

Not Just Cars, Buses

While you don’t see any BYD cars on US highways, you do see an increasing number of BYD pure electric buses. The company has made huge headway since it opened an assembly plant in Lancaster, California in 2013, and recently produced its 300th bus.

Worldwide, BYD dominates the market and has produced over 50,000 pure electric buses in just nine years.

As for the battle of the lithium-ion battery, Tesla’s Gigafactories are going head-to-head with BYD’s factories for the production crown, and for now BYD has the world’s largest.

Located in the western province of Qinghai, BYD’s 24GWh power battery factory is aiming to increase total production capacity to 60GWh by 2020. And it has the advantage that Qinghai province is a major source of lithium.

The Qinghai plant is BYD’s third battery factory in China after Shenzhen and Huizhou, and the company is constructing a fourth plant in Chongqing, which will have an annual capacity of 20 GWh.

“Electrification is a done deal as several countries have announced a deadline for the sale of internal combustion engine cars to end. Electric vehicles are on the cusp of another boom,” said BYD President and Chairman Wang Chuanfu, at the time of the Qinghai plant’s opening.

The question is whether BYD’s race with Tesla is a “done deal” as well.

BYD and Berkshire Hathaway

In 2008, Berkshire Hathaway bet on BYD’s potential, purchasing 225 million shares. It’s an investment that has paid off handsomely. Berkshire’s original investment of $230 million has grown in value almost ten-fold, and is now worth roughly $1.96 billion.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2019 David Mazor


Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway and BYD, 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.

Commentary: Here’s One Big Thing to Like in Buffett’s Annual Letter

(BRK.A), (BRK.B)

Warren Buffett may be frustrated that he can’t find any “elephants” to acquire, but he did give hope to Berkshire investors that there is one elephant-sized company that he would love to own more of, Berkshire Hathaway.

In his just released Annual Letter to Shareholders, Buffett stated “it is likely that – over time – Berkshire will be a significant repurchaser of its shares…”

While Buffett made no mention of paying a dividend, which is something he has been negative on in the past, he is clearly willing to put more of Berkshire’s $112 billion in cash into stock buybacks if the price is right.

It’s a process that’s already begun.

In the 3rd quarter of 2018, Berkshire bought back $928 million of its stock, which brought the 2018 total to more than $1.3 billion.

Now, with no big acquisition moves on the horizon, Buffett seems to be warming even more to the idea.

Remember, he stated that in future buybacks Berkshire would be a “significant repurchaser.”

Does this indicate that future buybacks could be substantially larger than what we saw last year?

It all comes down to price, and whether in Buffett’s opinion Berkshire is trading below its intrinsic value.

“If the market prices a departing partner’s interest at, say, 90¢ on the dollar, continuing shareholders reap an increase in per-share intrinsic value with every repurchase by the company,” Buffett explained.

“Assuming that we buy at a discount to Berkshire’s intrinsic value – which certainly will be our intention – repurchases will benefit both those shareholders leaving the company and those who stay,” Buffett said.

Ever cautious, Buffett is only interested in buybacks if they create value for shareholders, noting that “Blindly buying an overpriced stock is value destructive, a fact lost on many promotional or ever-optimistic CEOs.”

In his letter, Buffett also highlighted how over the years stock repurchases of some of the minority stakes Berkshire holds have given it an increasing share of those companies without spending a dime.

He pointed out that “Berkshire’s holdings of American Express have remained unchanged over the past eight years. Meanwhile, our ownership increased from 12.6% to 17.9% because of repurchases made by the company. Last year, Berkshire’s portion of the $6.9 billion earned by American Express was $1.2 billion, about 96% of the $1.3 billion we paid for our stake in the company. When earnings increase and shares outstanding decrease, owners – over time – usually do well.”

And over time, as Berkshire increases its own buybacks, hopefully shareholders will do well too.

© 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.

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.