In the past few days, it has emerged that Warren Buffett (Trades, Portfolio), the CEO of Berkshire Hathaway and arguably best investor of all time, held talks with Uber with the goal of potentially making a substantial investment in the ride-sharing business.
In response to an article published on Bloomberg, Buffett told CNBC, "I'm a great admirer of [Uber CEO Dara Khosrowshahi] ... Some of the reported details are not correct, but it's true that Berkshire had discussions with Uber."
According to the financial news outlet, Buffett's firm Berkshire Hathaway offered Uber a $3 billion investment earlier this year, shortly after Japanese conglomerate SoftBank secured its stake in the business at a valuation of $48 billion, down from $60 billion at Uber's peak.
What is fascinating about this scenario is that Uber is not a typical Buffett business. In fact, it's nearly the opposite of what Buffett's entire career suggests he would buy.
For a start, the company is not profitable (nor is it likely to be for some time). It has suffered tremendous reputational damage over the past few years, and above all, this is a relatively speculative tech business.
So what could Buffett like about this opportunity?
Well, there's one major factor, and that's Uber's size. Since the app first came to market, it has carved out a strong niche for itself in the ride-sharing market. This size gives it a moat against competitors. Yes, competitors like Lyft are eating away at market share, but Uber remains the dominant player around the world, and this is unlikely to change anytime soon with deep-pocketed investors such as SoftBank willing and able to put up more cash.
Herein lies another possible reason for Buffett's interest. Berkshire Hathaway has a history of using its cash to buy out embattled companies, using its financial clout and flexibility to demand high rates of return for the level of risk taken. For example, last year Buffett inked a deal with struggling Canadian mortgage business Home Capital to provide it with a $2 billion credit line charging a 1% standby fee and 9% rate of interest on funds drawn. As part of the deal, Berkshire also became Home Capital's largest shareholder through its Columbia Insurance unit, which became a 20% owner of Home Capital in the initial rescue deal.
The shares are up around 43% from the initial $10 per share rescue price. Buffett could have been trying to agree on a similar agreement with Uber, one that would produce an attractive return for Berkshire, with limited risk for its investors (Buffett has shown a preference for using preferred stock to complete such deals).
This potential move by Buffett is also interesting because it shows his apparent aversion towards tech investments is breaking down. In recent months Apple has become Berkshire's largest investment. When asked about this, Charlie Munger (Trades, Portfolio) declared:
"It's a very good thing that Warren bought Apple. Either he's gone crazy or is learning. I prefer to think he's learning."Â
It seems Buffett is learning, and trying to change with the times. It is incredibly likely that he will make more significant technology investments over the next few months and years, even if they don't appear to offer value in the traditional sense. He has also said that missing out on the opportunity to invest in Google and Amazon was a mistake, so you could argue he's trying to avoid making the same mistake twice.
Indeed, Buffett is now constricted to some degree by the size of Berkshire. With a cash pile of over $100 billion to deploy, Buffett has to do large deals to move the needle. With tech becoming so dominant, and limited growth to be found elsewhere, these tech behemoths are the perfect hunting ground for the Oracle of Omaha.
In other words, it looks quite simply as if Buffett is once again changing with the times and the world becomes ever more reliant on technology and the companies that provide these tech solutions.
Disclosure: The author owns no share mentioned.
