Despite being one of history's greatest long-term stock pickers, Warren Buffett favors one short-term investing strategy known as "merger arbitrage," or buying stocks of companies trading below their acquisition prices.
In a recent Securities and Exchange Commission filing, Buffett-owned Berkshire Hathaway (NYSE: BRK.A) (BRK.B +1.28%) showed that it trimmed its ongoing merger arbitrage play of Activision Blizzard (ATVI +0.00%). Here are two investing takeaways from the latest move by the Oracle of Omaha.
Buffett has a long history with merger arbitrages
According to Warren Buffett, he has participated in merger arbitrages for over 50 years. Most recently, Berkshire Hathaway, under Buffett's direction, bought shares of Activision Blizzard after Microsoft announced it was attempting to buy the gaming company for $95 per share.
NASDAQ: ATVI
Key Data Points
Before Activision Blizzard, Buffett most recently participated in the merger arbitrages of Red Hat after IBM announced its intention to acquire the enterprise software company for $34 billion. And in 2017, Berkshire bought shares of Monsanto after Bayer declared its intention to buy the agrochemical and agricultural biotechnology for $66 billion.
Considering Warren Buffett's success with long-term investments, you might not think he'd be interested in a short-term investing strategy like merger arbitrage. However, in Warren Buffett's 1988 annual Berkshire Hathaway shareholder letter, 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 to relax our long-term investment standards."
While the long-term horizon is Warren Buffett's priority, merger arbitrage offers an upside in the short term, especially over holding cash, which loses its value to inflation.
Buffett hasn't given up on the acquisition just yet
Warren Buffett hasn't openly commented on the Activision Blizzard deal since he first announced his merger arbitrage play at Berkshire's annual meeting last year. However, Berkshire's 13F filings -- a quarterly report that discloses a holding company's stock positions -- give us some insight into his opinion on the possible acquisition since then.
Before Microsoft announced its intention to buy Activision Blizzard, a Berkshire investment manager purchased roughly 15 million shares of the gaming company. Then, according to Buffett, he was solely responsible for buying an additional 50 million shares as a pure merger arbitrage play in the first quarter of 2022. Berkshire added four million shares in Q2 2022 before trimming its position in Q3 2022 and Q4 2022.
| Quarter | Shares Bought (Sold) | ATVI Shares Owned | Increase (Decrease) | ATVI Ownership |
| Q4 2021 | 14.7 million | 14.7 million | New holding | 1.88% |
| Q1 2022 | 49.7 million | 64.3 million | 338.8% | 8.24% |
| Q2 2022 | 4.1 million | 68.4 million | 6.4% | 8.75% |
| Q3 2022 | (8.3 million) | 60.1 million | (12.1%) | 7.7% |
| Q4 2022 | (7.4 million) | 52.7 million | (12.3%) | 6.7% |
While we don't know what Warren Buffett and Berkshire have done with its Activision Blizzard stock since Dec. 31, 2022, there's no denying Berkshire sold nearly 23% of its position in the gaming company.
Notably, Berkshire never trimmed its previous arbitrage plays with Red Hat or Monsanto, despite the latter facing similar regulatory concerns.
Perhaps, Buffett is hedging his bets after unfavorable news from regulatory bodies regarding the Microsoft/Activision transaction. Or, as mentioned in the quote above, Buffett might think Berkshire's cash is better served in Treasury bills as Treasury yields have risen significantly over the past year. As of Sept. 30, Berkshire held nearly $78 billion in Treasury bills.
Still, Berkshire owning 52.7 million shares of Activision Blizzard, or 6.7% of its shares outstanding, remains significant.
Should you sell Activision Blizzard Stock?
Even Warren Buffett would likely tell you there is a lesser chance today of the Microsoft/Activision Blizzard going through as initially intended versus when the deal was announced. Microsoft will probably need to satisfy many complications and regulatory hurdles for regulators to approve the deal.
Recently, Activision Blizzard traded for around $77 per share, or roughly 19% below its acquisition price of $95 per share. Activision stock becomes less appealing if the deal falls through, with revenue and earnings per share falling from 2021 to 2022.
Nonetheless, Warren Buffett, hasn't completely given up on the acquisition. Therefore, investors looking to capitalize on the upside of the deal going through -- even in a modified fashion -- shouldn't either.
