Buffet’s big speculation

Monsanto (MON) is a dominating seeds and pesticide company, an important agriculture player in the world. But people around the world have virtually polarized view on it. Those who like it think MON has helped to solve one of the most challenging problems facing human beings, the shortage of foods with increasing population. On the contrast, those who hate it think MON is an evil that is destroying human beings due to its gene-modified products. As always, you take your side as you see fit and it’s none of my business. What I’m talking here is not about like or dislike of MON but what a potential opportunity we may see with Monsanto. I think there is a big speculative opportunity for MON at the moment. It is called arbitrage trade (AT). If youdon’t know what an AT is about, take a look here as I talked about it before. Now I think the master investor, Warren Buffet, is making a big AT bet for MON. Let me explain.

Last May, the German chemical/agricultural giant Bayer announced to acquire Monsanto with a 45% premium in the price tag, making MON worth $128 per share if the deal goes through. At that time, MON was trading around $90 and immediately its stock prices shot up to $110 or so. But without going into details, there is a huge uncertainty whether this deal could go through even though now both companies’ boards have approved the merger. That’s why an arbitrage trade opportunity is emerging with a 15% up or down range for a profit or loss. If the deal goes through, MON will be worth $128 per share at closing, a jump from the current $110ish price. If fails, it will likely go down towards where it was before the MA announcement around $90. We now know that Buffett is betting big for a successful merger of MON with Bayer. Per the regulatory filing, Buffett’s Berkshire Hathaway bought 8 million shares of Monsanto worth about $1 billion as of end of 2016. It’s worth noting that he bought the MON shares apparently after the MA announcement, meaning he must be more confident than not that the MA will prevail. Otherwise, he will immediately lose about 15-20% of its MON holdings on the paper. 

While there is no way to know the exact intention of Buffett with this trade, I bet Buffett is making a short term trade with a long term perspective in his mind. After all, MON is a very good long term dividend grower by itself. If the MA fails, Buffett will likely just hold the MON shares to earn its good growing dividends for long term. The short term paper loss is not a concern at all for Buffett as we all know as long as he sees the long term value of it. If the MA succeeds, Buffett will make a quick 15-20% profit! If you understand this, you can again see how smart Buffett is as a master investor. While this TA is quite risky for most of people out there, it is a win-win deal for Buffett apparently!!