🤑 Copying Warren Buffett's $1.2B Trade

Y’all ever heard of that phrase before? Well, Warren Buffett just took it to the next level — and luckily, we can follow his actions to make money too.

In this post, we’ll cover:

• How Warren Buffett is set to profit more than $1B from a single trade

• The mechanics behind how it works

• How we can do it too

The $1.2B Trade

If you’re in a rush and don’t have time to read this entire post, just watch this TikTok video I made last week about the trade.

— What’s Happening?

Here’s the deal — companies of all shapes and sizes grow in one of two ways: organic, or inorganic.

Organic growth is what you likely think of when someone says “business is booming!” It means their marketing is working, products are being sold, and everything is moving up and to the right. The business is experiencing momentum catalyzed by effective marketing, pricing, and demand.

Inorganic growth is when you acquire another company and merge it with your existing company — when this happens, you combine businesses and therefore are a larger business. You’re still growing your business, but it’s not because of your marketing efforts or because of an increased demand for your existing products. It’s growing because you “bolted on” a new business alongside your existing business.

Inorganic growth is exactly what Microsoft ($MSFT) is doing with Activision Blizzard ($ATVI) — they’re acquiring the video game company to bolt them on to their existing Xbox business segment, making it larger.

— So, What?

Similar to the jeans you bought last week, publicly traded companies also have price tags. You all probably knew this — but a company’s price tag is essentially their market capitalization. The market capitalization is calculated by taking the current stock price and multiplying it by the total number of shares outstanding.

Microsoft confirmed their intention to acquire Activision Blizzard for $68.7 billion, or $95 / share.

This means every shareholder of Activision Blizzard will be given $95 in cash per share of Activision Blizzard stock they own. This happens automatically behind the scenes within your online broker.

Now you might be catching on to the incredible opportunity here.. Activision Blizzard’s stock price is trading far below this $95 / share purchase price!

— Warren Buffett’s $5.3B Bet

As shown and explained above, Activision Blizzard is on pace to be acquired by Microsoft for $95 / share — and despite this information being public, the stock is only trading for $77.53 / share right now.

Warren Buffett saw this arbitrage opportunity a mile away and began building a position in Activision Blizzard as explained during his annual shareholder meeting.

Now the 92-year-old investor owns $5.3 billion worth of Activision Blizzard stock, equating to nearly ~9% of the entire company. This is the 11th largest holding in his portfolio at a 1.6% weighting.

Here’s what’s going on..

Warren Buffett realized the market wasn’t properly “pricing in” Microsoft’s acquisition of Activision Blizzard successfully passing through the Federal Trade Commission’s guidelines and protocols. Instead, the stock market is “pricing in” a lot of doubt and uncertainty.

To take advantage of this arbitrage opportunity, Warren Buffett bet big.

If we assume the acquisition goes through and Activision Blizzard becomes part of Microsoft, Warren’s 68.4 million shares of Activision Blizzard stock are bought off him for $95 / share. Assuming he bought these shares for ~$77 / share — that’s an $18 per share profit, or $1.2 billion in profit across all 68.4 million shares.

The best part?

He didn’t have to do anything but hold the shares.

— Why Aren’t They $95 / share?

After a company announces their intention to acquire a publicly traded company, the stock price of the other company immediately shoots up to announced price per share.

In this example, after Microsoft announced their intentions to acquire Activision Blizzard for $95 / share — we’d have expected the stock to immediately shoot up to that price.

However, that didn’t happen.

It shot up to about $82 / share and has hovered around that range ever since.

But why? Why not $95?

The Federal Trade Commission, also known as the FTC, is the organization that “busts monopolies” around the country. For example, they sued Facebook back in 2020 over illegal monopolization of social media after acquiring Instagram in 2012 and WhatsApp in 2014.

Did this suit stop them?

Well, no. They’re still Facebook. But the FTC is trying to block Facebook’s next acquisition. So this stuff does happen.

Because of this uncertainty around the FTC, Microsoft, and Activision Blizzard — the stock market isn’t going to fully price-in this acquisition taking place until there’s been very solid progress made.

— Progress Thus Far

Just the other week Microsoft’s Gaming CEO, Phil Spencer, shared with Bloomberg how encouraged he and his team are about the progress they’ve made thus far with regulators around the globe.

The CEO of Activision Blizzard also shared this letter with his employees regarding the acquisition just last week.

All-in-all, progress seems to be moving in the right direction. The main stakeholders from both sides of the aisle (Microsoft and Activision Blizzard) have been vocal, positive, and transparent about what’s been going on behind the scenes.

The Trade for Us Normal Folk

Just own stock in Activision Blizzard.

If the acquisition is approved, as folks including Warren Buffett think it will be, the stock will be bought from you for $95 / share — representing an ~$18 per share profit, or about a +22% return on your investment.

If the acquisition does not go through and is blocked by some regulatory entity around the world, then you own stock in the largest game development studio in the world — growing revenue at +20% annually with 41% adj. EBITDA margins .. not bad!

In all seriousness, I don’t think the acquisition will be blocked. It’s also really reassuring to see Uncle Warren put his stamp of approval on the trade.

Let’s not forget his two most important rules:

1. Never lose money.

2. Never forget rule number 1. 

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.