Warren Buffett’s Activision Merger Arbitrage “Bank/Credit Card Bonus” Deal

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While listening to the 2022 Berkshire Hathaway Annual Meeting Q&A session (full video and transcript at CNBC), I was amused to hear that Warren Buffett announced that he bought shares of Activision Blizzard stock as part of a “workout”.

The very short version is that Microsoft (MSFT) has entered an agreement to purchase Activision Blizzard (ATVI) for $95 a share. As of close today 5/9/2022, you could buy ATVI for about $77.17 a share. If the sale goes through and closes in June 2023, you would earn a 23% return a little over a year.

The amusing part is that given the size of Berkshire Hathaway, even buying 10% of ATVI at the current price would only cost about $6 billion with a fixed upside of around $1.4 billion. If the deal closes, Berkshire would increase its $700 billion market cap at most by a one-time 0.2%. That’s the same ratio as someone with a $100,000 net worth doing a bank or credit card bonus deal for $200. 🤔

Even though Warren Buffett spends most of his time gradually building Berkshire Hathaway into a cash-gushing legacy fortress that will run for the next 100 years, he still can’t give up a good short-term deal either! It’s like an old habit. I love it! 🤣 Here’s how he ends it:

And incidentally, I don’t talk this over with Charlie. I mean, you know, he knows that occasionally I’ll see an arbitrage deal and do it. And, you know, 50 years ago we were doing it together, and his general feeling is, “Why is Warren fooling around with this kind of stuff, even.”

But it’s the old fire horse that occasionally it looks like the odds are in our favor. But absolutely we can lose money on that company, and, you know, fairly large sums of money, depending on what happened if the deal blows up.

And there will be a lot of people that want the deal to blow up. But Microsoft doesn’t want it to blow up, so we’ll just have to see what happens.

In addition, you and I can stroll over any brokerage app and participate in this “special situation” opportunity as well. There is still risk involved, and I’m sure there is plenty of discussion about it on various stock trading forums that I never visit, but here are my notes:

  • Around October and November 2021, Berkshire Hathaway acquired shares of ATVI at an average price of about $77 a share. This was the decision of either Ted Weschler or Todd Combs, as Buffett corrected. This would indicate that $77 a share would already reflect a margin of safety below intrinsic value, by their estimation, even without any acquisition talks.
  • In January 2022, Microsoft announced an agreement to buy ATVI at $95 a share in an all-cash deal. MSFT has more than enough cash to comfortably pay for this deal.
  • Since then, the shares have traded around $75 to $82 a share. Even after Buffett announced his participation in this deal, the price hasn’t moved much.
  • The primary risk is that US or EU regulators will stop the transaction due to anti-trust concerns. MSFT will pay a break-up fee of approximately $4 a share if it fails due to anti-trust issues.
  • Although he downplays it, I can only assume that Buffett – with all his experience – really does believe that this transaction has a good likelihood of going through, and even if it doesn’t the downside is limited. He has a different view than the market, and is willing to bet real money on it.

As an illustration, for every $1,000 invested into ATVI at $77.17 a share and cashed out at $95 a share, the upside potential is a $230 as of June 2023 (deal deadline, a little over 13 months from now). You can scale this number up or down based on your investment. $10,000 invested means $2,300 upside, and so on. The downside potential is unknown if it falls apart, and theoretically unlimited as with any business.

Disclosure: I bought a small position in ATVI in my side money account. This is not a recommendation for your situation and you should perform your own due diligence. Some people like to bet on a football game because it makes it more interesting, but I’d rather participate in something with an expected positive return and an educational component. I don’t believe in paper trading; skin in the game is a better teacher.

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  1. Very thought provoking article but this deal makes me very nervous. While the arbitrage is attractive, you’re tying up your money for over 12 months. Given the uncertainty in the world (and world markets), I see more downside risk than upside reward. If ATVI stock price continues to fall, there is a point in which MSFT will determine that it’s more cost effective to back out of the deal and pay the $4/share penalty. My feeling is that the stock price may be nearing that point already. Just my two cents.

    “I am more concerned with the return OF my money than the return ON my money.” -Will Rogers

  2. Brian Nelson says

    Look at SIMO. They were just bought out and at todays price will return 20%+ by first half 2013. The only reason that deal doesn’t go through is if there is a bidding war. I feel that SIMO was low balled on this offer and may get a better deal. I don’t own stock in this company, although, I may buy some in the near future.

  3. M. FITZPATRICK says

    This is really interesting, isn’t it unusual for a deal like this to be made in the future? Which makes me think, shouldn’t all corporate buyouts be required to close X days in the future from the announcement, unless exceptions are made (maybe not a year but say 50+ days) I know it’s not capitalist but helps level the playing field allowing main street to participate, and perhaps helps to eliminate insider trading to a degree? Also, has anyone thought about buying LEAPS? It appears at this moment June16.23 calls are $5 at a $85 strike price, leaving $10 upside if it goes through. Put up $500 to make $1000. It’s not a “safe bet” but with Warren/Microsoft backing it, you have heavy weights in your corner, is this not potentially doubling your money or nothing?

  4. Rookie question:

    If i buy and holding 100 shares of ATVI, what would happen if the deal does go thru? Will I get some MSFT shares?

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