If investors are supposed to follow the “smart money”, it appears as though video game developer Activision Blizzard should be on their radar. Warren Buffett, Chairman and CEO of Berkshire Hathaway, announced recently that the multinational holding company acquired 9.5% of video game developer Activision Blizzard.
According to the company’s latest filings with the U.S. Securities and Exchange Commission (SEC), Berkshire Hathaway has added 14,658,121 shares of Activision Blizzard to its portfolio. At current prices of $77.00 per share, that equates to $1.12 billion.
But Buffett has said recently that Berkshire Hathaway has added to that number and built a 9.5% stake in the company. It’s now worth around $5.6 billion.
Why Is Buffett Investing in Activision?
Many investors might be wondering why the Oracle of Omaha has his sights on the video gaming industry. Buffett is famous for investing in strong companies that he believes are trading at unjustifiably low values.
As Buffett once explained to his partners in a letter, “This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
Back in January, Microsoft announced it was buying Activision Blizzard, the name behind Xbox, and epic games like Call of Duty, World of Warcraft, and Diablo, for $69 billion. That’s equal to $95.00 per share.
At the time, Microsoft CEO Satya Nadella said, “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”
Immediately after news of the blockbuster acquisition was announced, shares in Activision Blizzard spiked from the low $60s to around $80.00 per share. Even with the current stock market sell-off, shares are still trading at $77.00.
Why are shares trading at $77.00 when the planned acquisition is valued at $95.00 per share? The market is pricing in the chance the acquisition won’t go through.
The deal is facing some headwinds, including allegations of insider trading in Activision shares just before the $69 billion takeover was announced in January. The U.S. Federal Trade Commission is also reviewing the planned acquisition. Microsoft also needs to receive approval from at least 17 different jurisdictions before the deal can close in 2023.
The gap between where Activision is trading (at around $77 per share) and where Microsoft agreed to buy it represents a difference of $18.00. And that is what Warren Buffett is hoping to capitalize on.
What Is a Merger Arbitrage?
Called a merger arbitrage, the investment strategy aims to make money from successfully completed mergers by taking advantage of the difference between stock prices before and after mergers.
“If the deal goes through, we make some money, and if it doesn’t go through who knows,” Buffett said.
Time will tell, but Buffett is one of the most successful, storied investors in history. Since 1965, Berkshire Hathaway shares have seen an average annual return of 20.0% compared to the S&P 500’s 10.2% gains.
It’s every investor’s goal to find market-beating stocks. But to replicate Berkshire Hathaway’s success, investors would need deep pockets. Instead, one of the best ways to invest in a huge basket of stocks focused on different industries, is through an Exchange Traded Fund (ETF).
HERO ETF: Diversified Investing in Video Games
Interested in a diversified approach to investing in video games? Evolve E-Gaming Index ETF (TSX Ticker: HERO) may be the right investment for you. HERO ETF gives investors access to equity securities of companies, listed domestically and globally, with business activities in the gaming industry. This ETF invests in companies involved in hardware, software and services relating to the electronic gaming industry. Learn more about this fund by clicking here.
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