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Berkshire Hathaway Is Buying an IPO for the First Time Ever

By Matthew Frankel, CFP® – Sep 10, 2020 at 7:07AM

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Warren Buffett has typically avoided IPOs, but Berkshire Hathaway has committed to buy this one.

Warren Buffett, the billionaire investor who controls most of Berkshire Hathaway's (BRK.A -0.83%) (BRK.B -0.40%) stock portfolio, has traditionally avoided IPOs. In fact, the last time Buffett participated in an initial public offering, Dwight Eisenhower was the president of the United States.

However, we just learned that Berkshire Hathaway has committed to invest more than half a billion dollars of its capital in an upcoming IPO. Here's what we know, why this is such an unusual move for Berkshire, and whether Buffett or someone else at Berkshire is behind the deal.

Warren Buffett smiling.

Image source: Getty Images.

Berkshire's upcoming IPO investment

According to a Securities and Exchange Commission filing, Berkshire Hathaway has agreed to purchase $250 million of Snowflake stock at whatever its upcoming IPO price ends up being. Tech giant salesforce.com (CRM 0.32%) also agreed to purchase stock in the same amount. The transaction would be a private placement.

In addition, Berkshire is also going to purchase another 4.04 million shares from a current Snowflake stockholder. Based on the midpoint of the expected IPO pricing range ($80), this means Berkshire would end up investing more than $550 million, which would translate to about 2.5% of the data storage company.

In a nutshell, Snowflake is a tech company whose primary product is a cloud-based data solution. The company's revenue for the first half of 2020 more than doubled from the same period a year ago, as did its customer count. To say its growth has been impressive would be an understatement.

Buffett tends to avoid IPOs

This may seem like a highly uncharacteristic move for Berkshire Hathaway, as Warren Buffett has a long history of avoiding IPOs and advising investors to do the same. At Berkshire's 2016 annual meeting, Buffett told the crowd, "You don't have to really worry about what's really going on in IPOs. People win lotteries every day..." It isn't hard to see why he'd say that. In the year before that statement, more than half of IPOs ended the year below their offer price.

What's more, Buffett has specifically said that he avoids IPO investing and has throughout his tenure at Berkshire. In a 2019 CNBC interview, when asked if he planned to buy the Uber IPO, Buffett replied, "In 54 years, I don't think Berkshire has ever bought a new issue." Buffett clearly stopped short of saying that Berkshire would never buy an IPO, but that's a pretty strong statement.

In another 2019 interview, Buffett revealed that the last time he bought an IPO was in the 1950s, when he bought shares of Ford. Ford went public in 1956.

To be fair, Berkshire has come close to investing in IPOs in recent years. For example, Brazilian fintech company StoneCo went public on Oct. 25, 2018, and Berkshire bought an 11.3% stake on Oct. 29 of the same year, just a few days later. But it appears Buffett was correct in that Berkshire has technically never participated in an IPO.

Why does Berkshire want to invest in Snowflake?

Here's the multimillion-dollar question: Why is Snowflake so appealing to Berkshire that the company is willing to make it the first IPO investment since Buffett took the reins 56 years ago? What's so special about this one?

We may never know the answer. With a few notable exceptions, Buffett is tight-lipped when it comes to his specific reasons for buying individual stocks.

It's also important to mention that Berkshire has two other investment managers who have made decisions with the company's stock portfolio: Todd Combs and Ted Weschler. The pair has been responsible for most of Berkshire's tech-focused investment decisions in the past few years. While we don't know for sure, the Snowflake investment seems more likely to have been initiated by one of Buffett's lieutenants than by the Oracle of Omaha himself.

Either way, the fact that Berkshire is willing to put more than half a billion dollars of its capital to work on an IPO for the first time in the company's history is a major endorsement of Snowflake's business model.

Matthew Frankel, CFP owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Salesforce.com. The Motley Fool owns shares of Stoneco LTD. The Motley Fool recommends Uber Technologies and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway (A shares) Stock Quote
Berkshire Hathaway (A shares)
BRK.A
$420,667.49 (-0.83%) $-3,512.51
Berkshire Hathaway (B shares) Stock Quote
Berkshire Hathaway (B shares)
BRK.B
$279.36 (-0.40%) $-1.13
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$156.23 (0.32%) $0.50

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