Summary
- Warren Buffett's Berkshire Hathaway elected to invest a chunk of capital into the IPO of data company Snowflake.
- The move is a departure from Buffett's typical playbook, but it shouldn't be surprising that his strategy has changed.
- The company's fundamentals leave a lot to be wanted, but it's an interesting play on a big, data-centric future.
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Warren Buffett is notorious for guiding his massive conglomerate, Berkshire Hathaway (BRK.A) (BRK.B), by the core tenets of value investing. Under his leadership, the business has a long history of buying excellent companies at a fair price, but things have not always been this way. Originally, Buffett’s ideology was more along the cigar-butt style of investing proposed by Benjamin Graham. This involved buying fair or even poor companies at a wonderful price and taking one last ‘puff’ from them before they died. As his conglomerate grew and the influence of partner Charlie Munger rubbed off on him, his strategy shifted to what made Berkshire the behemoth it is today. Now, it looks like times are changing again.
In the new era, there are few excellent companies that can be bought at a fair price that are large enough to move the needle for the Oracle of Omaha. With the continued shift of our society toward technological innovation and the influence of younger managers like Ted Weschler and Todd Combs, Berkshire’s approach has been changing. The latest example now is Berkshire’s decision to invest hundreds of millions of dollars into the IPO of Snowflake (SNOW). Weschler and Combs have been largely responsible for smaller investments around this size, but Buffett has not been absent from decisions on the tech side. Probably the greatest example of Buffett’s commitment to this change was his willingness to allow Berkshire’s stake in Apple (AAPL) to grow to more than $100 billion (including appreciation of the stock in the business) as of August of this year. Because of the size of the deal, it’s unclear who all is responsible for the decision to participate in Snowflake’s IPO, but it could be a sign that investors should consider following suit if they can buy in at a price similar to what Berkshire is receiving in the transaction.
A look at the move
Though Buffett has not always stayed away from IPOs, investing in them has been a rarity. His view has been that they are generally overpriced. In this case, however, Berkshire has decided to throw caution to the wind. According to the terms of the agreement between Snowflake and Berkshire, the latter will acquire $250 million worth of Class A common units in the IPO. They are joined by a Salesforce (CRM) subsidiary, which is making a transaction of identical size. This will be new money injected into Snowflake, and unlike the rest of the company’s IPO, it will not carry underwriting fees and discounts. If Snowflake goes public at $80 per unit, which is the mid-point of its expected range, this would translate to Berkshire receiving 3.125 million common shares in the business. In addition, Berkshire has agreed to buy 4.042 million Class A common units from existing shareholders in the business at the IPO price. Collectively, this could result in a price to Berkshire of $573.36 million with the $250 million commitment factored in and assuming the $80 per share estimate.
This maneuver by Berkshire is part of a larger offering by Snowflake. The company is issuing 28 million Class A common units, plus they are making another 4.20 million available for their underwriters. In all, if the IPO price is $80 per share, the company would receive net proceeds of between $2.7 billion and $3 billion. That’s inclusive of the combined $500 million that Berkshire and Salesforce are allocating toward it. With everything said and done, and without factoring other possible share issuances that could be made for employee compensation and other things, Snowflake should end up with 278.78 million common units available, valuing the firm at around $22.30 billion. All incoming investors are receiving Class A common shares, while insiders are receiving Class B ones. Economically speaking, these units are identical. However, the Class A units carry just one vote apiece, while the Class B units carry 10. This gives the insiders of the business an overwhelming majority of the vote over the business’ affairs.
