Microsoft (MSFT, Financial) has been one of the most successful businesses of the past three decades. The company successfully took over the PC market in the 90s with its universal operating system, and its Microsoft Office Suite of products has also become ingrained in organizations around the world.
As the world moved away from desktop PCs, some analysts expressed concern that the company would not change with the times and adapt to the new world. However, that is just what the business has been able to do. As well as building out a gaming division, the company has successfully pivoted to the cloud. It is now one of the largest tech businesses in the world, and its cloud platform is also one of the most successful.
A business moat
Microsoft has constructed a moat around its business, both in terms of the technology the company owns and provides as well as its management expertise. It is precisely the kind of business that Warren Buffett (Trades, Portfolio) might want to buy for Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) portfolio, from my observations.
However, the billionaire investor has avoided Microsoft for decades. He was offered the opportunity to invest in August 1997. Microsoft insider Jeff Raikes emailed the Berkshire Chairman and CEO back then, arguing that he believed the business characteristics of Microsoft were "very similar" to those of Coca-Cola (KO, Financial) and See's Candy.
Buffett replied to say that he liked the look of the business, but trying to predict its longevity was impossible. This was at a time when the Oracle of Omaha frequently expressed the opinion that he did not understand technology, and therefore, would not invest in the sector.
Since then, Microsoft's moat has continued to grow. During this time, Buffett has also become close friends with Microsoft founder Bill Gates (Trades, Portfolio). He has also overcome his initial wariness of technology stocks, and Apple (AAPL, Financial) is currently the largest equity holding in Berkshire's mammoth equity portfolio.
Buffett likes to say he will only invest in businesses when he has a high level of trust in the management and understands the operation. I do not think it is unreasonable to say that due to his close friendship with Gates, Buffett knows the ins and outs of Microsoft and its executive team. But even though the business seems to tick all the boxes for a Buffett-style investment, it hasn't been added to Berkshire's portfolio.
A 'mistake'
In 2018, Buffett stated that because Gates sat on both Berkshire and Microsoft's board, "it just would be a mistake for Berkshire to buy Microsoft." He went on to explain that if Microsoft announced a piece of positive news immediately after Berkshire's position was revealed, some people might ask if Buffett had access to inside information.
Several things have changed recently that could potentially cause Buffett to alter his rule. Firstly, Gates stepped down from Microsoft's board last year. He also stepped down from his position at Berkshire. So, that link no longer exists (or at least, it's not as public and official). Second, Buffett has recently stepped down from his position on the board of the Gates Foundation, severing another link. Third, Buffett is slowly moving back from his day-to-day management of Berkshire. His investment managers, Todd Combs and Ted Weschler, are taking on more investment activities, and Greg Able has been named as Buffett's successor.
Put simply, it would appear as if the reasons Buffett has cited for not being able to invest in Microsoft in the past no longer exist. However, the company still has tremendous competitive advantages and remains one of the most successful tech businesses of all time.
Considering these factors, I think there's a chance Microsoft could appear in Berkshire's portfolio. Based on what the Oracle has said, it doesn't look as if there is now any reason for him not to own the stock. However, I should state that this is just my own personal speculation - I have absolutely no knowledge of whether or not Berkshire intends to make this investment.
