Warren Buffett, a disciplined buy-and-hold value investor, revealed that he’s dabbled in a short-term trading strategy popularized by fast-money hedge funds — merger arbitrage. At Berkshire Hathaway’s annual shareholder meeting last weekend , the “Oracle of Omaha” said he scooped up more Activision Blizzard stock in a merger arbitrage play, betting that Microsoft’s proposed acquisition of the video game company will close. “Every now and then I see something that I want do to in that field. But very seldom, because they’ve got to be big. The profit is limited,” Berkshire’s chairman and CEO said. Merger arbitrage is a strategy that involves simultaneously purchasing and selling short the respective stock of two merging companies. This is because the target company’s stock typically trades below the acquisition price. As the deal nears completion, the target’s stock typically rises and the acquirer’s shares fall. So arb traders make money in a bet on the deal closing as they buy the target and sell short the acquirer. In January, Microsoft announced intentions to buy Activision for $95 per share. Activision had traded around $60 before the deal announcement and jumped to $80 on the news. Buffett said when the stock settled back a little from the initial pop, he believed there was a big enough spread for him to profit from. Still, there’s great risk in a bet like this as lawmakers could block the deal on antitrust concerns. “It’s the old fire horse that occasionally it looks like the odds are in our favor, but absolutely we can lose money on that company, fairly large sums of money, depending on what happened if the deal blows up,” Buffett said. “If they say you’re going to get $95, you’re not going to get $96, and if the deal blows up, you may have a stock that’s at $40 or something.” The legendary investor revealed that he and his longtime business partner Charlie Munger started doing merger arbitrage deals five decades ago, back when it was called “workouts.” “Charlie and I, 50 years ago, we used to do a lot of that sort of thing. And Gus Levy did it at Goldman Sachs. And we even went back one time I think on British Columbia power, didn’t we, Charlie?” Buffett said. “I mean we spent a lot of time analyzing the probabilities of announced deals going through … it hasn’t worked overall too well in recent years.” Buffett said he did an arb play with agrochemical company Monsanto a couple years ago when Bayer AG acquired it. He said he also pulled off the same bet with software company Red Hat, which was bought by IBM in 2019.
Warren Buffett holding box of See’s Candies at the Berkshire Hathaway Shareholders Meeting in Omaha, Nebraska.
Warren Buffett, a disciplined buy-and-hold value investor, revealed that he’s dabbled in a short-term trading strategy popularized by fast-money hedge funds — merger arbitrage.