Key points:
- Berkshire Hathaway has increased its Activision stake to 9.5%
- This is a pure speculation on the Microsoft takeover
- As Warren Buffett has said, if goes through or it doesn’t
Should we follow into Activision Blizzard (NASDAQ: ATVI) stock, follow Warren Buffett that is? Betting against him has not been, on average, a good idea over the decades but he’s by no means got every decision right over that time. In fact, the actual secret of Buffett’s success is that he’s taken well judged risks, so that while there are inevitably losses at times the gains more than make up for them.
At which point we need to think through this latest trade he’s done. Microsoft (NASDAQ: MSFT) has made a bid for Activision Blizzard. OK, we know that. We also know that the deal is going to face regulatory scrutiny from varied governments around the world. That’s just how these things work these days. This means there’s a risk that the deal will or won’t go through.
The traditional method of trading a takeover deal is to go short the buyer and long the acquisition. The buyer’s going to issue more stock to make the purchase, there will be more stock around, each one is worth less. Also, and less often said, takeovers tend to be – over 50% of them – value losing for the shareholders of the acquiring company.
Here though that’s not going to work because it’s a cash price being paid. There will be no MSFT issuance, they’ve got the money just sitting there. Enough to pay $95 a share for ATVI, all $69 billion of it.
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The current share price is $77.90 (up $3 since the news broke over the weekend) so that’s $17.10 cash profit to be booked if the deal goes through. 22% looks good even if it takes a year and we’re in a year with 7 or 8% inflation. There’s also a tiny dividend yield, half a percent or so, to aid with carrying costs.
So, should we therefore be doing the same as Berkshire Hathaway (NYSE: BRK.A) has been and buy up stock to collect this return? For that is what the announcement was over the weekend. As Buffett said at the AGM of Berkshire, they’ve picked up some 9.5% of the Activision stock on just that basis.
No one does know if the deal will go through, there are simply too many regulators who have to be appeased along the way. But on the other hand 22% does indeed look attractive. So, Buffett thinks that risk/reward ratio is worth it. As he himself says, if the deal goes through they make some money. If it does, well, yes there’s the possibility they’ll lose some.
This is by no means a sure thing given those regulatory approvals required. On the other hand if the Buffett evaluation is that this is a worthwhile idea – that is, that the probability plus the 22% potential return gives this a positive net present value – then perhaps we should go with Berkshire Hathaway and be long Activision.
It is a speculation but then this is following in the footsteps of Warren Buffett.
