Berkshire Hathaway recently disclosed in a regulatory filing a significant investment in Oracle Corporation. Similar to 2009, when it invested in a U.S. railroad, Berkshire has demonstrated a knack for strategic thinking in times of market uncertainty or industry risk.
Warren Buffet’s Berkshire Hathaway has long developed a reputation for savvy stock investments both in good and in challenging times.
In 2009, at the height of the global recession, the financial and supply chain worlds were abuzz regarding the then blockbuster announcement that Berkshire would acquire the Burlington Northern Santa Fe Railroad (BNSF) for $26 billion, making the firm the sole owner of a major U.S. railroad. At the time, this was the largest acquisition in size made by the investment firm. Wall Street and indeed many in the supply chain management community were somewhat puzzled as to why Buffet would invest so much money in a railroad. Our readers may recall that during 2008-2009, railroads were hemorrhaging cash because of the severe drop in shipping volumes brought on by depressed U.S. and global manufacturing output.
We, along with other media, speculated as to the strategic purpose of such an investment. Buffet had long acquired a reputation of thoroughly researching all of the firm’s potential investments and electing those that had long-term strategic advantage in their respective industries. Our blog commentary at the time opined that the acquisition represented a huge bet on the future of more efficient transportation infrastructure spanning the U.S. and on a budding U.S. oil exploration capability that was just emerging. We cited specific Buffet investment criteria:
- A competent and visionary senior management team managing the railroad. BNSF’s productivity gains were leading the railroad industry at the time.
- Strategic routes focused on the movement of key commodities including serving the majority of the U.S. major grain producing regions. A quarter of its revenue was derived from shipping bulk coal, but more importantly, the low-sulfur, cleaner burning coal mined in Wyoming and Montana, that is shipped East or to export markets.
- BNSF, by the location of its route structure, is a major provider of intermodal services involving ocean containers transported across the country by rail.
Three years later, in a follow-up blog commentary, we noted specific indicators coming into view. The railroad had invested hundreds of millions in capital improvements in order to be positioned to take advantage of the booming reserves of crude oil being harvested from the Bakken formation in North Dakota and Montana. BNSF was positioned to be a major carrier of crude across the U.S. to reach Midwest, Gulf and East Coast refining or export destinations. The railroad further experienced double-digit volume increases in moving chemical carloads, which were a byproduct of the new crude oil discoveries as well as the specialized sand required in new fracking oil exploration processes across the region. At the same time, intermodal container volumes moving from West Coast to interior U.S. regions also expanded.
So, why are we once again, revisiting Berkshire and its counter intuitive strategic investment tendencies?
Berkshire Hathaway Investment in Oracle
Earlier this month, Berkshire Hathaway reported in a regulatory filing, a 41.4 million share stake in enterprise technology provider Oracle Corporation, representing upwards of a $21 billion investment at purchase.
During Q3, the investment firm had made investments in 12 different stocks, more than half of which were financial industry focused including major investments in Bank of America, Goldman Sachs, JP Morgan Chase, among others. Another noted move in Q3 was an added investment in Delta Airlines.
Financial industry media has been quick to note that historically, Buffet and his investment team have made some of their largest investments during turbulent periods, and the current U.S. stock market landscape is indeed in a turbulent period with wild swings predicated on market uncertainties. That is somewhat similar to our 2009 look-back at the BNSF investment, but without the presence of a full-blown global recession. What is similar is the financial media headline is one of puzzlement regarding the investment in Oracle.
Buffet and Berkshire have long shunned investments in technology companies principally because he could not understand their business models nor their markets as to which tech companies had strategic or competitive advantage. That tendency changed as Buffet turned has turned over stock picking to two senior Berkshire executives.
What has since followed were select investments in tech, one with Apple and the other IBM.
The Apple investment likely stemmed from the dominance of the iPhone in the smartphone market, the cult-like brand loyalty of Apple customers, and the very rich cash position of the company that has led to increased cash dividends and stock buybacks.
The IBM investment appeared to be a bet on the IBM brand and its potential in advanced technology markets related to Cloud based computing, artificial intelligence, advanced analytics and other strategic technology markets.
It is no secret that IBM has since had a disappointing track record in achieving momentum in such technology sectors, which led up to the recent blockbuster bet the company acquisition move targeting RedHat.
Earlier this year, Berkshire had completely sold out of IBM.
In Q3, Berkshire further sold out of Walmart, representing a long-standing investment not only a global retailer but an emerging online fulfillment technology provider with its prior acquisitions of Jet.com and other online platforms.
With the Q3 filing, the investment firm has now increased its stake in Apple to ownership by an additional 500,000 shares and now has its second technology bet riding with Oracle.
As our readers are likely aware, Supply Chain Matters has regularly profiled Oracle’s technology capabilities, not only as they relate to directly supporting end-to-end supply chain, manufacturing and product management business process needs, but in other areas related to Cloud-based database technology, autonomous computing, information security and IT infrastructure. We have a content section dedicated to Oracle along with other major ERP and enterprise tech providers.
Oracle’s unfolding multi-year strategic plan has been the ability to provide customers the broadest, best engineered and most secure options in enterprise and business focused information technology needs. The latest iterations of that strategy apply advanced concepts of artificial intelligence and machine-learning to broader areas of the information technology stack. Unlike other enterprise technology providers, Oracle is not solely about technology platform, but the engineering and leveraging of the entire compute and applications stack to maximize the benefits of Cloud-based computing while leveraging artificial intelligence-based capabilities to strengthen information security vulnerabilities. The company has further made strides in overcoming previous customer perceptions for being difficult to deal with or overly expensive. Senior executives now have direct customer named assignments to insure customer satisfaction and responsiveness to needs.
We do not profess to be financial investment experts, nor do we profess do have inside knowledge as to how Berkshire Hathaway ultimately makes its investment decisions. Like many others, we can admire the rigor of research and how such strategic investments ultimately fare in added financial benefits.
Just like our analogy of the BNSF Railroad investment, sometime in the not too distant future, we all will be referencing Q3-2018 as the point where Wall Street was initially puzzled by this significant Berkshire investment move. Once again, we will likely observing other strategies unfolding concerning Oracle’s positioning in the tech market, perhaps praising the visionary outcome.
From our lens, this is indeed about a bet on the future of the technology market and which providers will get there sooner.
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Disclosures: Oracle Corporation is a client of the Ferrari Consulting and Research Group, the parent to the Supply Chain Matters.
The author of this blog has no direct equity ownership in any of the companies mentioned.