Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) raised some eyebrows when it first bought shares of Activision Blizzard (ATVI). That's because the transaction occurred not long before Microsoft (MSFT 1.82%) announced plans to acquire Activision for nearly $69 billion in an all-cash transaction.
Berkshire CEO Warren Buffett felt the need to clarify things, releasing a letter explaining that Berkshire didn't have any prior knowledge of Microsoft's plans. Nothing ultimately became of the controversy.
Buying a stake in Activision proved to be a lucrative move for Berkshire. Now, though, Buffett is selling Berkshire's Activision stock before the Microsoft acquisition closes.
Taking profits
At one point, Berkshire Hathaway owned 9.5% of Activision. By the end of 2022, its stake had been trimmed to 6.7%. Three months later, the position was down to 6.3%. Buffett and his team appeared to be taking profits, but in a limited fashion.
Such restraint appears to have been thrown out the window. Activision submitted a 13G filing to the U.S. Securities and Exchange Commission (SEC) on Monday that revealed Berkshire sold most of its shares. The giant conglomerate's stake was reduced to only 1.9%.
Buffett decided to dump shares on June 30. That was two weeks before a federal appeals court denied the Federal Trade Commission's attempt to temporarily block Microsoft's acquisition of Activision.
Unlike the initial decision for Berkshire to invest in Activision, this latest move shouldn't ignite any controversy. Activision's stock is up around 10% higher after Berkshire's sale, thanks to the positive appeals court decision.
A different game for Buffett
Buffett once famously stated that his "favorite holding period is forever." So why is he selling a big block of Berkshire's position in Activision after owning the stock for less than three years?
The transactions involving Activision are a different game for Buffett. First, he didn't make the call to buy the stock initially. The decision was instead made by one of Berkshire's investment managers, either Todd Combs or Ted Weschler.
However, Buffett later personally entered the fray and increased Berkshire's stake in Activision. He said at Berkshire Hathaway's annual meeting in 2022 that he views buying shares of Activision as an attractive merger arbitrage play.
The idea behind merger arbitrage is that often, the stock of a company that's being acquired trades below the offer price. That's because there's a risk that the deal won't be finalized.
There's been considerable uncertainty about whether Microsoft would be able to complete its purchase of Activision because of opposition from government regulators. Buffett saw this as an opportunity for Berkshire.
Should you sell Activision stock too?
It's never a smart idea to sell a stock only because a famous investor is doing so. However, there is another important consideration: If you bought shares of Activision Blizzard with merger arbitrage in mind, there isn't much upside potential at this point. Microsoft's offer price was $95 per share; Activision's current share price is only around 2% below that level.
So why even consider holding on to the stock? It's still possible that the Microsoft deal could fall through. Microsoft is appealing a decision by U.K. regulators to block the acquisition. If you think that the transaction won't be finalized and that Activision stock will perform better over the long term on its own, selling now doesn't make sense.
Both of the assumptions required for this tactic seem very iffy, in my view. Following in Buffett's footsteps and taking profits with Activision could be the best move right now.
