Buffett took action, this time it was arbitrage?

Gelonghui Finance ·  Apr 1 03:15

Source: Gelonghui

According to the latest US Securities and Exchange Commission documents, Buffett's company Berkshire spent 29 million US dollars last week to buy 8.9 million shares of Liberty SiriusXM (LSXMA) Class C shares and 110 million US dollars to buy 3.8 million Class A shares.

Liberty SiriusXM is a tracking stock of SiriusXM, a satellite broadcasting company controlled by American media mogul John Malone, and owns about 80% of Sirius XM SiriusXM (SIRI)'s shares.

Sirius XM is an audio entertainment company that offers music, sports, comedy, talk shows, news, and other channels through paid subscription services.

Regarding this investment, “Barron's” reports that some “Berkshire observers” judged that according to Buffett's previous trading style, this deal seemed very special and rare. It wasn't like Buffett's handwriting, but more like a transaction led by his deputy Ted Wechler.

From a business model perspective, this company is indeed very different from companies such as Apple, Coca Cola, and Wells Fargo that Buffett has held for a long time.

On closer examination, this is probably more like Buffett's “arbitrage” deal.

Liberty SiriusXM has announced a merger with SiriusXM. On December 12, 2023, Sirius XM announced that it has decided to simplify the trading structure of tracking shares. Sirius XM tracking shares (LSXMA, LSXMK, and LSXMB) will merge with Sirius XM. After the merger, the new company will retain the Sirius XM brand and transaction code SIRI.

According to the announcement, current shareholders of Sirius XM will receive shares of Sirius at a ratio of 1:1, while holders of existing tracking shares will receive shares of the new company at a ratio of 1:8.4. Based on the above share exchange ratio, the arbitrage space was once as high as 45%, but as Sirius XM's stock price continued to plummet, the arbitrage space narrowed markedly.

Sirius XM's stock price experienced sharp shorting this year, with a cumulative decline of 28.72% during the year. Currently, Sirius XM's short share accounts for 27% of its tradable shares, which is quite a large percentage.

In addition to Berkshire, well-known funds such as Millennium and Point72 have also participated in this arbitrage opportunity. Some analysts warned that as a transactional opportunity, there are also risks. Until shareholders tracking shares get the new company's shares, will they flock to sell, causing the stock price to collapse? Is there only room for arbitrage or rapid contraction or even loss?

Buffett has been investing in arbitrage for more than 60 years. He used to simply divide the methods of the companies he invests in into three categories: the first type is ordinary low-priced stock investment, the second type is merger and acquisition arbitrage, and the third type is to increase investment value through holdings.

There are many relevant books on Buffett's first and third investment methods, but the second type of investment method: merger and acquisition arbitrage, is relatively rare due to its expertise and complexity.

In his letter to shareholders, Buffett mentioned his views on arbitrage investing. The main points are:

1. Arbitrage opportunities appear in corporate activities such as mergers and acquisitions, liquidation, restructuring, and spin-offs. Investment results are mainly determined by company behavior rather than stock market conditions. The biggest risk of arbitrage is that an accident occurs midway, and the expected progress has not been realized. Common accidents include government intervention such as antitrust, shareholder veto, and tax policy restrictions.

2. Do not listen to rumors or “insider information” when investing in arbitrage; only read the company's announcements, and only take action after the announcement is made. To improve the probability of success, it is necessary to understand all situations as much as possible, continuously track the latest developments, and evaluate all aspects based on experience.

3. Arbitrage investments have high certainty and short holding time. The annualized yield is quite good, and the absolute profit is more stable than investing in undervalued stocks. When the market falls, arbitrage investments accumulate to a large extent, which can bring a leading edge; in a bull market, it can drag down performance.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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