Berkshire Takes $10.7 Billion IBM Stake, CEO Buffett Says

By Andrew Frye and Maryellen Tighe - Nov 14, 2011 8:20 PM GMT+0700

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) acquired a 5.5 percent stake in International Business Machines Corp. (IBM), the world’s biggest computer-services provider, as the billionaire chairman accelerated stock purchases.

The holding of about 64 million shares was acquired mostly in the third quarter and cost $10.7 billion, Buffett told CNBC in an interview today. That means his company paid an average of about $167.19, compared with IBM’s Nov. 11 close of $187.38. IBM advanced to $188.85 at 7:58 a.m. in early trading in New York.

“They have laid out a road map and followed it extremely well,” Buffett said in the interview of Armonk, New York-based IBM. “I probably read the annual report of IBM every year for 50 years.”

Buffett, 81, drew down Omaha, Nebraska-based Berkshire’s cash hoard in the three months ended Sept. 30 as U.S. stocks headed for their biggest quarterly decline since 2008. The chief executive officer invested $23.9 billion in the period as he acquired Lubrizol Corp., took a preferred stake in Bank of America Corp. (BAC) and broadened the stock portfolio.

IBM is investing in areas such as emerging markets and analytics software to boost earnings. The company has said it will generate $100 billion in cash flow between from 2010 to 2015 and return 70 percent of that to shareholders.

New CEO

Last month, IBM named Virginia “Ginni” Rometty the first female CEO in the company’s 100-year history. She is taking over from Sam Palmisano, who increased earnings by steering the company toward software and services, and disposing some hardware businesses such as personal computers.

IBM targets operating earnings of at least $20 a share by 2015, up from $13.35 the company projects for this year. Software will make up half of total profit in 2015, IBM forecasts. Analytics software, which helps businesses predict trends, is expected to draw $16 billion in sales by 2015, while cloud computing will draw $7 billion, IBM predicts.

Buffett “had the funds and the opportunity to purchase shares at an attractive price,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “He’s not going to panic when there is some temporary economic problems which could cause the stock markets to plunge for some period of time. He just sees that as a buying opportunity.”

Mike Fay, an IBM spokesman, referred to Buffett’s comments on the company’s growth plans and said IBM didn’t immediately have anything to add.

Bank of America

The Standard & Poor’s 500 Index, which fell 14 percent in the third quarter, has advanced 12 percent since Sept. 30.

Buffett spent $11.4 billion on equity securities in the nine months ended in September, compared with $3.9 billion in same period last year and $3.2 billion in the first three quarters of 2009. The stock purchases this year are in addition to the $5 billion Berkshire spent on Bank of America preferred stock and warrants and the takeover of Lubrizol for about $9 billion.

“If the stock is cheap, we will buy it,” Buffett said in a Sept. 30 interview with Bloomberg Television.

Berkshire’s investable funds were boosted this year as Goldman Sachs Group Inc. (GS) and General Electric Co. returned financing that Buffett extended during the 2008 credit crunch. Cash was also bolstered by earnings at units from the Burlington Northern Santa Fe railroad to the Geico car insurer. The third- quarter investments reduced Berkshire cash hoard to $34.8 billion as of Sept. 30 from $47.9 billion three months earlier.

Cash Flow

“The guy has a billion plus coming in to Omaha” every month, said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc.

Berkshire, which posted profit of $13 billion last year, reported a 24 percent decline in third-quarter net income as Buffett’s equity derivative bets pressured results. Insurance units reported a $1.7 billion pretax underwriting gain, while net earnings at the railroad rose 8.5 percent to $766 million.

Berkshire had $68.1 billion in stocks at the end of September. That includes investments of non-U.S. companies, including the biggest shareholding of Germany’s Munich Re and a stake in the U.K.’s Tesco Plc.

Buffett, in preparation for his eventual retirement, hired money manager Todd Combs last year and instructed him to focus on equities. Combs was assigned to oversee as much as $3 billion and can make trades without consulting Buffett. Berkshire said hedge fund manager Ted Weschler will join the company next year and take charge of a portion of the portfolio.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Maryellen Tighe in New York at mtighe6@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.