It suddenly became big news when Warren Buffett revealed yesterday that Berkshire Hathaway invested $10.7 billion into IBM shares. At first glance it looked like its newsworthiness had little to do with the size of the investment, and more to do with the Oracle of Omaha finally conquering his phobia of tech companies.
At least that is what the headlines made it out to sound. There is Economic Times’ “Warren Buffett sheds tech aversion with big IBM investment” and The Week’s “Buffett finally goes hi-tech – and it looks like a smart move.” Or better yet, Wall Street Journals’ “Buffett’s Tech Conversion”.
Regardless if the outlet is depicting it as a smart radical change for Buffett or his holy conversion, there are some interesting numbers worth noting looking into.It marks the most Berkshire has ever paid for a minority stake in a publicly traded company. It also means Berkshire now has taken a 5.4 percent stake in IBM and is the company’s second biggest shareholder. The biggest is State Street Corp.
But as a sign that Buffett is acting out of character, not so much.
The Financial Times points out that this wasn’t as radical as everyone seemed to be suggesting. IBM is less prone to the uncertainty than Buffett found unattractive about internet companies and is more stabilized by its services and consulting revenues. In the same vein, Scott Philips of the Sydney Morning Herald noted that IBM has very high customer loyalty. And investing in a strong brand goes hand in hand with Buffet’s investment style.
This isn’t nearly as startling as if Buffett was investing in risky internet companies like Groupon, or announcing he was looking with hungry eyes at Facebook’s upcoming IPO.
It is however reminding a lot of people about when Buffett hit the jackpot by investing in Coco-Cola in the late 1980’s. Within four years Coca-Cola doubled through the end of 1987, and is currently valued at about $13.5 billion. According to David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc. IBM “is a behemoth, compared to even where Coke was back then. But it is certainly a company that can grow.”
But it might be too much of the old play to prove profitable for some investors. Doug Kass of Seabreeze Partners Management had sold his shares of Berkshire Hathaway after the news.
According to a note he released, “Yesterday’s $10 billion investment in IBM (IBM) is, to this observer, a reflection that larger deals are needed to move the needle and that more ordinary and plain vanilla investments will be the feature of Berkshire’s portfolio strategy in the future.”
The real question here isn’t if Buffett got over his allergy to tech companies like so many news outlets are framing it. The real question here is if Berkshire can ever recapture its glory days before Buffett retires or even after? Buffett’s co-investors, Todd Combs and Ted Weschle have yet to stand out from the Oracle’s shadow. And maybe Buffett’s investment legend has become so grand that even he can’t topple it.
“What is almost certain is that Buffett’s old black magic will not be easily duplicated by his appointees,” wrote Kass.