Warren Buffett has repeatedly made it very clear that he has no interest in investing in the technology companies, considering that they fall outside of his "circle of competence." So it may come as a surprise to many that Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) disclosed a new $200 million position in a technology stock in a filing Monday. Is Buffett straying from his area of expertise or is there more to the investment than meets the eye?
The stock in question is Fiserv (Nasdaq: FISV), one of the largest providers of electronic commerce solutions to financial institutions. It is a dominant player in a tech subsector -- financial technology -- that has an attractive quality compared to many other areas in technology: It's possible for firms to build an entrenched competitive position.
It's all about inertia
Consider the inertia that prevents you from switching from Microsoft Office to competing products, even free ones such as Google Docs or Oracle's OpenOffice. Now consider a financial institution that runs software to fulfill critical tasks such as transaction processing or fund transfers. Its software is connected to multiple other applications and is already deeply embedded across different areas of the organization. Now we're talking about the sort of inertia that is sufficient to slow the rotation of the earth, let alone the actions of an IT purchasing manager.
For a financial institution, there are enormous costs and risks associated with replacing one software vendor with another; once a provider's system is installed, competitors face a steep uphill battle trying to dislodge the incumbent. That is precisely the type of unassailable position Buffett looks for in the businesses he wants to own.
That's not all. Fiserv derives 80% of its revenues from account and transaction processing fees -- recurring revenues from long-term contracts. It's a classic example of the tollkeeper model, which is wonderfully stable. No wonder Buffett likes this stock. (Motley Fool Inside Value advisor Joe Magyer likes it, too; he selected it as his 11 O'Clock Stock last month.)
Rebuilding a core position
Yesterday's filing revealed one other significant action: The 73% increase in Berkshire Hathaway's Johnson & Johnson (NYSE: JNJ) stake. In 2008, Buffett reduced his positions in Johnson & Johnson and Procter & Gamble (NYSE: PG) to fund the purchase of high-yielding, multibillion-dollar investments in General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS).
This re-up represents a vote of confidence in a health-care blue chip at a time when the segment has fallen out of favor. Given Buffett's concerns about the long-term risk of inflation, adding to a position in a "franchise" stock that yields 3.7% does Berkshire's portfolio no harm at all.
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