Normally, Warren Buffett (Trades, Portfolio) praises the companies he buys. Even when it comes to becoming a shareholder rather than buying a company outright, the Oracle of Omaha likes to say that shareholders should approach their stake as business owners, with a focus on quality and the long-term outlook. He typically only turns negative on one of his holdings if the situation has changed significantly, such as with the major U.S. airlines during the beginning of the Covid-19 pandemic.
Paramount Global (PARA, Financial) seems to be an exception to the norm. Buffett’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) first reported a stake in the media company in its 13F for the first quarter of 2022, continuing to add more shares in the next few quarters until it owned 14.42% of the company’s total shares outstanding. Yet, in an April 2023 interview with CNBC’s Becky Quick, Buffett had nothing positive to say about Paramount. “It isn’t fundamentally a good business,” he stated, going on to criticize the company’s production and distribution of movies and even its streaming service.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Buffett watchers who cultivated a bullish view on Paramount due to his buy may be feeling like the rug has been pulled out from under them after this interview. Why would Buffett, one of the greatest value investors of all time, buy the stock of a company he dislikes on a fundamental level? Buffett didn't answer that question outright in the interview, saying, “We’ll see what happens.”
We can’t be sure of Buffett’s motives unless he confirms them himself, but based on his comments, there do seem to be a couple of possibilities as to why he might have bought the stock despite disliking the company.
A possible acquisition target
One possibility is that Buffett is hoping for Paramount to be acquired. “You’ve got some people with deep pockets that aren’t gonna quit,” Buffett told Quick.
Ever since Viacom and CBS re-merged in 2019 to form what is now Paramount Global, there has been plenty of speculation that it would be gobbled up as part of the streaming wars due to its relatively cheap valuation and high-quality content catalog.
Despite a content catalog that ranks third in demand in the U.S. accord to Parrot Analytics, behind only The Walt Disney Co (DIS, Financial) and Warner Bros. Discovery (WBD, Financial), Paramount has a price-book ratio of just 0.65 as of this writing (though it was closer 1 around when Berkshire was buying the stock). The enterprise value of $29.53 billion is nearly twice the market cap of $15.38 billion. If a buyer were to materialize, it would likely pay a hefty premium compared to Berkshire’s buy price, which would net an easy profit.
If this is the case, it wouldn’t be Berkshire’s only merger arbitrage play in recent times. The investment giant also owned 6.74% of Activision Blizzard’s (ATVI) total shares outstanding as of the end of 2022 in anticipation of its hotly contested acquisition by Microsoft (MSFT).
While Buffett tends to prefer long-term opportunities, he has made quite a few exceptions in the past if he felt the situation called for it. He addressed the topic of merger arbitrage as follows in his 1988 letter to shareholders:
“In past reports we have told you that our insurance subsidiaries sometimes engage in arbitrage as an alternative to holding short-term cash equivalents… We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas. At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments.”
Buffett’s portfolio managers
The other possibility is that Buffett may not have been the one behind the Paramount buy at all. It could have been one or both of his portfolio managers, Todd Combs and Ted Weschler, or they may have proposed the idea before Buffett signed off on it.
While Buffett has said in the past that Combs and Weschler get free reign only on positions below $1 billion, and they must get clearance from Buffett before initiating any stakes above that value, it is likely that he has been giving them more leeway over the years. In fact, in his 2021 shareholder letter, Buffett revealed that the duo was overseeing about 10% of Berkshire’s equity portfolio, which was valued around $350 billion at that time.
Paramount has a weight of 0.53% in Berkshire’s portfolio. The position is worth about $2.2 billion as of this writing after Paramount’s stock price slid 30% between the first quarter of 2022 and April 2023. Berkshire’s top 10 holdings make up 88.98% of the equity portfolio weight, so that means most of the other 40 holdings have a solid chance of being Combs and Weschler picks, though of course that’s not a given. Anything above $1 billion is still in the grey zone.
