Warren Buffett (Trades, Portfolio)’s conglomerate Berkshire Hathaway (BRK.A)(BRK.B) bought approximately $1 billion worth of shares in leading gaming firm Activision Blizzard (ATVI, Financial) during the fourth quarter of 2021. The stock traded for an average share price of $68 during the quarter, which made the market cap at the time of purchase just $50.4 billion.
Then, in January 2022, Microsoft (MSFT, Financial) announced its plans to acquire Activision Blizzard for $68.7 Billion. The stock popped by 20% on the news, sending the shares up to $81 per share.
How much will Buffett make on the deal?
From my calculations, Buffett was buying an estimated $975 million worth of Activision Blizzard shares at an equivalent market cap of approximately $50.4 billion, or $68 per share. Microsoft plans to pay $68.7 billion in cash for the company, or $95 per share.
Thus, if everything goes according to plan, Buffett will make a whopping39% profit if the deal closes.
How did Buffett buy the stock cheap?
This situation was a textbook classic of Buffett’s investment style. Activision Blizzard was undergoing some bad headlines, which sent the stock sliding down 26% from November to December of 2021. The company was facing a state lawsuit which alleged a sexist culture at the gaming company and unequal gender-based pay.
The company was also slow on getting new titles out, delaying the releases of the games Overwatch 2 and Diablo IV. In addition, Call of Duty: Vanguard had some disappointing reviews upon release.
Of course, Buffett and his team at Berkshire are well-known for being contrarian value investors, being "greedy when others are fearful." This must have looked like a classic opportunity to take advantage of market pessimism that had little to do with the company's profitability.
Did Buffett Know that Microsoft would acquire the stock?
Some are tossing around the theory that perhaps Buffett knew ahead of time that Microsoft would try to acquire Activision. However, despite being long-time friends with Microsoft co-founder Bill Gates (Trades, Portfolio), I don’t believe Buffett had any clue Microsoft would make this bid.
For one, Gates stepped down as Microsoft's CEO way back in 2014. Secondly, this would be insider trading, which Berkshire is not stupid enough to do - given the size and public spotlight of the conglomerate, there's no way it would get away with such a practice. Thirdly, it just isn’t Buffett’s style to trade special situations such as acquisitions these days.
I believe Buffett and Berkshire's portfolio managers saw value in the stock and bought for the long term, as they would any other stock. A little luck from Microsoft’s acquisition accelerated the share price's move towards its fair value.