Berkshire Reports June Buys, Sells, and An Arbitrage Play

By Joe Ponzio on August 15, 2007  |  10 comments

Every three months, Buffett and Berkshire have to report their holdings to the SEC. Good news for us because we can see them for free. Click here for the report. Let's see what Buffett is buying, selling, and arbitraging.

First The Sales

Berkshire sold out of H&R Block, Pier One Imports, Norfolk Southern, and Union Pacific. If you own any of these, now may be the time to review them. If the world's greatest investor doesn't want them, are you sure that you do? (Hey, if you have a reason to hold them, do so.)

Berkshire also reduced its positions in Ameriprise Financial (by 41%), Tyco International (by 37%), and Western Union (by 68%). I don't know if these were meant to be permanent holdings, but they're not anymore.

Now, The Additions

Buffett added to some of his existing positions. We know about Burlington Northern (added 13%), but he also increased his position by 59% in US Bancorp, more than tripled his Wellpoint holding, nearly quadrupled his investment in United Health Group, bought 72% more Wells Fargo (Berkshire now owns nearly 8% of it), added 5% more Procter & Gamble, tripled his investment in Sanofi Adventis, and increased his Johnson & Johnson holding by 9%.

The word on the street was that Berkshire was looking to make a major purchase/buy-out. The prime suspect was Procter & Gamble; however, the numbers seem to be pointing towards Wells Fargo. I won't speak too soon about it, but he did buy another 3.2% of the entire company in the past three months.

New Holdings

New to Berkshire's portfolio were 8.7 million shares of Bank of America and 2.8 million shares of Dow Jones & Company. I haven't looked at Bank of America yet; but, the Dow Jones addition is very likely a merger arbitrage.

What Happens In Merger Arbitrage

Merger arbitrage is when you buy a company based on, well, a merger. When Company A offers to buy Company B for $20 a share, and Company B is selling for $15 a share, you can arbitrage the merger, buy Company B for $15, and sell it in the merger for $20—assuming the merger goes through (that's the risk).

With the Dow Jones position, I assume Buffett is doing exactly that. Rupert Murdoch is buying Dow Jones & Company for $5.6 billion, or roughly $65 a share. Dow Jones' market cap right now is $5.02 billion. Assuming the merger goes through, today's purchasers of Dow Jones & Company stand to make $7 per share. Assuming it goes through in the next six months, that is a 24% average annual return.

Based on Buffett's position, Berkshire stands to make nearly $19 million on the Dow Jones arbitrage.

Summing It Up

A little bit of action in the Berkshire portfolio. Of course, this all happened through June 30, 2007. With the market in such turmoil today, Buffett is likely on a spending spree. I guess we'll know more in three months.

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