A few days ago, I wrote an article about my thoughts on Berkshire Hathaway's (BRK.A) (BRK.B) latest tech deal. The deal will see the conglomerate invest more than $570 million into the IPO of cloud database company Snowflake.
In the article, I noted that I think Todd Combs and/or Ted Weschler was most likely behind the transaction, as Warren Buffett (Trades, Portfolio) would be unlikely to be investing in an IPO or high-valued tech stock.
However, this is all still speculation until we hear word from Buffett himself. There are also a couple of ideas that have come to my attention that lead me to think Buffett could have actually been the one behind the decision after all.
Back to 2011
To understand a bit more, we need to go back to 2011. That year, Buffett broke his long-standing rule not to invest in technology stocks and bought shares of IBM (IBM, Financial).
At the time, this was considered to be an odd development. For years, the Oracle of Omaha had avoided the technology sector, claiming that he did not understand the industry, so he did not want to invest in something he did not understand for fear of losing money.
This clearly changed in 2011. In the following years, it became clear why Buffett had this change of heart. He had seen how the business interacted with other companies in the Berkshire empire. This seemingly gave him enough insight to understand how the company works and its main competitive advantages.
Buffett later told CNBC he had been "hit between the eyes" by its advantages in finding and keeping clients. "It's a company that helps IT departments do their job better," he said. "It is a big deal for a big company to change auditors, change law firms", or for IT departments to move away from using IBM, he said. "There is a lot of continuity to it."
These comments make a lot of sense. Buffett had seen how IBM had helped companies like GEICO and BNSF work, and how critical the company was to these firms. He thought this was the company's moat.
And it was, until it fell behind. In 2017, Buffett admitted that he'd made a mistake with the business. In another interview with CNBC, he said, "I don't value IBM the same way that I did six years ago when I started buying... I've revalued it somewhat downward... IBM is a big strong company, but they've got big strong competitors too."
Some similarities
IBM had an edge in the physical server market, but the company missed the cloud-computing boat. This was a huge strategic mistake. The cloud-computing revolution has eroded demand for the group's IT equipment and services, which are heavily geared towards companies that install and run their own IT facilities.
These companies now no longer need to invest enormous sums in physical IT infrastructure, as they can just outsource to companies like Snowflake.
This is why I think there's a chance Buffett himself could have had at least some input in this latest deal to buy part of the business. Buffett saw how Berkshire's companies relied on IBM to run their systems. He may have seen the same with Snowflake. If GEICO or BNSF uses the business to run critical systems, the Oracle of Ohama may have followed the same thought process as he did with IBM.
Of course, this is just speculation. I have no confirmation that Buffett pulled the trigger himself. We'll have to wait and see if he comments on it in any interviews or the group's annual letter.
Nevertheless, I think this is an interesting view to consider. If IBM was invaluable to companies as a physical server provider, doesn't that mean that could-computing businesses are just as critical? Could that be their competitive advantage and moat?
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Why Warren Buffett Still Owns Struggling Businesses
- Berkshire Hathaway's Snowflake Deal Shows Us Where Warren Buffett Is Heading
- Warren Buffett on When Diversification Makes Sense
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
Also check out:
