- By Rupert Hargreaves
Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is set to invest more than $570 million into cloud database company Snowflake. These figures were revealed in the tech company's IPO filing, which was published on Tuesday.
According to the filing, Berkshire and Salesforce Ventures would buy $250 million of shares directly from the company at the time of its listing. On top of this commitment, the Oracle of Omaha's conglomerate has committed to buy a block of shares worth more than $320 million from one of the company's investors.
Two obvious things stand out about this deal. First of all, it is the fact that Berkshire is buying into an IPO. Buffett has famously always stayed away from IPOs. Even relatively recently, when commenting on Uber's (UBER) upcoming IPO, he said it's not something he would ever consider.
The other factor to note is the fact that this is a tech investment. Buffett has previously tried to stay away from this sector, although his stance has softened in recent years. (There is some debate if Apple (NASDAQ:AAPL) is really a tech business or consumer discretionary company in terms of structure - Buffett has said that he thinks it falls into the latter camp, which makes it easier to understand.)
But while this action is not a traditional Buffett-style move, Berkshire has done something similar relatively recently. In 2018, the conglomerate acquired 8% of the Brazilian payment processor StoneCo at its IPO price. With the stock changing hands at just under $51 compared to the IPO price of around $30, it looks as if this was a sensible acquisition at the time.
It was reported that one of Buffett's investing lieutenants, Todd Combs or Ted Weschler, was behind the StoneCo deal. On that basis, it seems reasonable to predict that one of them was behind the Snowflake deal as well.
This seems to be one of a string of recent developments that show how the Oracle of Omaha is trying to position Berkshire for when he leaves the business. In planning for his retirement (or death), Buffett faces two problems. He said he wants Berkshire to be run in a way that protects and grows wealth for its investors.
The billionaire investor has been able to accomplish this over the past few decades, but he is one of a kind. He built the business and is the majority shareholder. It would be impossible to replace him.
So, he's having to design the conglomerate in a way that it can look after itself when he is no longer around. This is already how Berkshire operates. Its divisions run independently of each other. However, Buffett is still in control of all major investment decisions. I think he's now trying to diversify the portfolio to make it easier for others to manage. That would explain some of his recent investments outside of traditional markets and sectors.
The other problem Buffett faces is reputation. Today, stakeholders are happy to work with Berkshire because Buffett is a trusted and respected individual. When he's gone, Berkshire could become just another conglomerate. Therefore, the business needs an edge. Buffett has been giving it one. By building up cash reserves, Berkshire has become one of the most solvent and fortress-like firms globally.
Even without Buffett overseeing operations, $140 billion in cash will give counterparties a reason to trust the business. It also provides whoever takes over with a tremendous amount of financial flexibility.
All in all, Berkshire's tech investment might seem out of place, but it may be part of a wider plan to diversify and strengthen the business in preparation for the next chapter.
Disclosure: The author owns shares in Berkshire Hathaway.
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This article first appeared on GuruFocus.