For the better part of six decades, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett has been running a master class on investing for Wall Street. During his tenure as Berkshire's chief, he's overseen close to a 5,500,000% aggregate gain in his company's Class A shares (BRK.A) and nearly doubled up the annualized total return, including dividends, of the benchmark S&P 500.
Considering how well the "Oracle of Omaha" has done from an investment standpoint, it's not surprising that investors tend to mirror his trades and traits to grow their wealth. Some of Buffett's best-known investing traits include his desire to own stakes in wonderful companies for long periods, as well as his tendency to purchase businesses with well-defined competitive advantages and strong management teams.
But what might come as a shock is that what Warren Buffett advises long-term investors do -- i.e., stay the course and bet on America's long-term success -- and what he and his top investment aides (Ted Weschler and Todd Combs) do over shorter periods, doesn't always mesh.
For instance, even though Buffett has repeatedly opined that investors shouldn't bet against America, he and his investing lieutenants have been net sellers of equities for seven consecutive quarters.
Additionally, Buffett doesn't always have the long term in mind when putting his money to work on Wall Street.
Warren Buffett does, occasionally, dabble in arbitrage opportunities
Although Weschler and Combs are known to be a bit more active on the trading front than Buffett and former right-hand man Charlie Munger ever were -- Munger passed away at age 99 in November -- the Oracle of Omaha does, from rare time to time, dabble in arbitrage opportunities.
For example, Buffett oversaw the increase in Berkshire's ownership stake in gaming company Activision Blizzard in early 2022 to more than 9%, shortly after Microsoft (NASDAQ: MSFT) offered to buy the company for $95 per share in an all-cash deal.
There were certainly some regulatory hurdles to this combination that played out over the course of more than a year. However, the uncertainties of this deal were more than reflected in Activision Blizzard's share price trading well below (more than 20% below, in some instances) Microsoft's all-cash offer. Ultimately, Microsoft gained the approvals it needed and closed its purchase of Activision in October 2023.
While Warren Buffett hasn't expressly stated that it's an arbitrage opportunity, there's a reasonably high probability that the buying activity we've witnessed by Berkshire's investment trio in satellite radio operator Sirius XM Holdings (NASDAQ: SIRI) and Liberty Media's Sirius XM tracking stock, Liberty Sirius XM Group (NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK), is arbitrage related. Berkshire Hathaway holds stakes in the Class A (LSXMA) and Class C (LSXMK) shares of the tracking stock.
In December 2023, Liberty Sirius XM Group and Sirius XM Holdings announced their intent to merge into one company and create a unified share class. The exchange ratio of Liberty Sirius XM Group shares into Sirius XM Holdings shares is to be calculated "based on (1) the number of shares of Sirius XM held by Liberty, reduced by a net liabilities share adjustment, divided by (2) the number of adjusted fully diluted shares of Liberty Sirius XM Group."
Although this final exchange ratio won't be determined until Sept. 5, it was approximately 8.4 shares of Sirius XM for each Liberty Sirius XM Group share when the merger to create one class of shares was first announced.
As of the closing bell on Aug. 23, Liberty Sirius XM Group stock was valued at what appears to be a notable discount to Sirius XM Holdings, based on the initial exchange ratio. This means we could see a convergence of the two securities, with Liberty Sirius XM Group increasing in value and Sirius XM declining in price, or perhaps one security making up the bulk of the valuation gap by rising or falling. With Berkshire holding more than $2.4 billion worth of Liberty Sirius XM Group stock, compared to $425 million in Sirius XM, it would appear Buffett and his team view this as a clear arbitrage opportunity.
To make things even more exciting, this new singular class of Sirius XM will be conducting a reverse-stock split following completion of the merger.
A stock split is a tool that allows publicly traded companies to alter their share price and outstanding share count by the same factor. Splits have no impact on the market cap or underlying operating performance of a company.
With a reverse split, a company's goal is to increase its share price and reduce its outstanding share count by the same magnitude. Based on a June 17 filing with the Securities and Exchange Commission, Sirius XM plans to conduct a 1-for-10 reverse split, which is expected to become effective after the close of trading on Sept. 9.
Reverse splits themselves aren't unique. We see them happen on a regular basis by struggling companies that are hoping to avoid delisting from a major stock exchange.
What makes Sirius XM's upcoming reverse stock split so unique is that it's in no danger of delisting. The only reason the company is undertaking a reverse split is because it closed out the June quarter with around 3.85 billion outstanding shares. With its share price depressed in the single digits by its large outstanding share count, select institutional investors might stay away or deem its low share price too risky. A reverse-split resolves this relatively minor concern. It's a rare instance where a reverse split shouldn't worry investors one bit.
And in the unlikely event that this isn't, somehow, an arbitrage wager by Warren Buffett and his investment team, Sirius XM absolutely brings clear-cut competitive advantages and an attractive valuation to the table.
Sirius XM is the only licensed satellite radio operator, which affords the company a certain degree of pricing strength with its subscribers. Following recent subscription price hikes from Spotify Technology, the door is wide open for Sirius XM to raise its prices.
However, the most meaningful competitive edge for Sirius XM might just be how it generates its revenue. Whereas most online and terrestrial radio providers rely heavily on advertising for the bulk of their revenue, Sirius XM brings in less than 20% of its sales from advertising.
The lion's share (77%) of its net sales comes from subscriptions. Businesses are likelier to reduce their ad spending during challenging economic times than subscribers to Sirius XM are to cancel their service. This leads to steadier and more predictable operating cash flow for Sirius XM, when compared to its online and terrestrial rivals.
Sirius XM stock is also historically inexpensive in a very pricey stock market. While the stock market has only been this pricey on a couple of occasions dating back to the early 1870s, Sirius XM is valued at just 10 times forecast earnings per share for 2025. This equates to a 44% discount to its average forward-earnings multiple over the last five years, and exemplifies why Sirius XM might make for a perfect long-term holding for Warren Buffett.
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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, and Spotify Technology. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Warren Buffett's Newest Arbitrage Opportunity Is Set to Undergo a Unique Stock Split in Less Than 2 Weeks was originally published by The Motley Fool