Warren Buffett’s low-tech tech play

It was early 2001 when Warren Buffett wrote to his shareholders with a message on the dotcom boom – his investment company Berkshire Hathaway wouldn’t be getting involved.

“We have embraced the 21st century by entering such cutting-edge industries as brick, carpet and paint,” Buffet wrote in the annual report.

“Try to control your excitement.”

It’s a message he’s repeated often, including a few months ago when he said it was “extremely difficult” to value the social media networks currently listing in the US.

But it appears Buffett isn’t completely immune to technology. Overnight he sensationally revealed that he has spent the last few months buying about 5% of tech giant IBM in a series of transactions worth a staggering $US10.7 billion.

But Buffett, who says he has read the IBM annual report every year for the past 50 years, was struck by something in this year’s edition.

“I read it when it first came out and then I went back and reread it,” he said during a three-hour interview on US business news channel CNBC.

“And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.”

Buffet always buys businesses with “moats” around them – that is, competitors cannot easily replicate their products or services, or steal market share from them.

While IBM is in an extremely competitive space, Buffett can see the moat. Just as it is “a big deal for a big company to change auditors, change law firms” so it is for a company to change IT vendors.

“As you go around the world there’s a fair amount of presumption in many places that if you’re with IBM that you stick with them, and that if you haven’t been with anybody or are developing things that you certainly give them a fair shot at the business,” he said.

Another factor that drew Buffett was the company’s ability to articulate and follow-through with its vision.

“I don’t think there’s… a big company that’s done a better job of laying out where they’re going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015.”

So Buffett disciples shouldn’t worry – the Oracle suddenly hasn’t got carried away with some new tech bubble or suddenly “discovered” the power of IT.

As always, this is an investment in a business with a proven track record, consistent earnings and strong competitive barriers around it.

There is, however, a question as to whether Buffett’s IBM represents great value. As the CNBC interviewers were quick to point out, IBM stock isn’t cheap.

Buffett countered by explaining that his $US44 billion acquisition of railway company Burlington National – which has so far performed very well – was also made when its stock was on a “high”.

It would appear that waiting for a price to dip isn’t Buffett’s big worry now – moving quickly and as quietly as possible is far more important to the Oracle.

One last point. The sheer size of the IBM deal and Buffett’s $US9 billion acquisition of Lubrizol also says that it’s unlikely that we will see any small deals from Warren Buffett anytime soon.

Buffett can no longer slowly build a stake in a company without attracting significant attention, so when he moves, he needs to move quickly and boldly.