The stock of the $27 billion of the aircraft component maker Precision Castparts Corp. (NYSE:PCP) jumped by 20% in pre-market trading on Monday after reports emerged saying that the company is in talks to be acquired by Warren Buffett‘s Berkshire Hathaway. Earlier today, Precision Castparts issued a statement in which it said that the boards of both companies have approved a definitive merger agreement, under the terms of which, Berkshire will pay $235 per Precision Castparts share in cash, which valued the deal at around $37.2 billion, including Precision’s outstanding net debt.
“I’ve admired PCC’s operation for a long time. For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports. Berkshire’s Board of Directors is proud that PCC will be joining Berkshire,” Warren Buffett was quoted as saying in a statement.
Berkshire was a long-term shareholder of Precision Castparts Corp. (NYSE:PCP) and during the first quarter of 2015, it raised its stake by 47% to 4.20 million shares, which made Berkshire one of the largest shareholders of the company. On its part, Berkshire might use around half of its cash and cash equivalent to complete the transaction. In its latest 10-Q report for the second quarter of 2015, the holding company disclosed holding around $60.69 billion in cash.
While the announcement of the deal did not come as a surprise, as it was anticipated for a couple of days since the first reports appeared, it is interesting to see if other major investors in Precision Castparts Corp. (NYSE:PCP) anticipated such a development. After all, the stock of the company is down by nearly 20% since the beginning of the year, excluding today’s pre-market gain. As it turns out, investors were bullish on the company, at least according to our data, which includes more than 700 funds. During the first three months, the number of funds holding the stock increased to 37 from 35, but what’s more important is that these investors boosted their positions and brought the aggregate value to $2.96 billion from $1.51 billion at the end of December. In this way, at the end of March, these investors held almost 10% of Precision Castparts’ outstanding stock (including Berkshire’s $882 million stake). Let’s take a closer look at the numbers to see, which funds would benefit the most from the merger between Berkshire and Precision.
But before we get to that, we should mention why we think it is important to follow the hedge fund sentiment surrounding a company. Even though on average equity hedge funds have outperformed the broader market, some separate classes of their investments managed to beat the market by a wide margin. Hedge funds’ weak performance might be attributed to their high fees and exposure to short positions, as well as their long investments in large-cap companies, which are more efficiently priced relative to the market. However, we determined that these funds’ small-cap ideas can beat the market, which was proven in our backtests (read more details here). Our portfolio of 15 most popular small-cap stocks among hedge funds returned 123% since August 2012 and outrun the market by around 65 percentage points.
The increase of capital inflow in Precision Castparts Corp. (NYSE:PCP) in anticipation of a positive development is a proof why tracking hedge funds can be profitable. The majority of largest shareholders among the funds we track, either initiated new stakes or boosted their holdings during the first quarter. Aside from Berkshire Hathaway, which sat on the top of the list, other large shareholders of the company with new positions included Eric W. Mandelblatt‘s Soroban Capital Partners, Thomas Steyer’s Farallon Capital, Jeffrey Ubben’s Valueact Capital, and Dan Loeb’s Third Point. In addition, Ken Griffin’s Citadel Investment Group more than doubled its position to 879,500 shares and Mario Gabelli’s GAMCO Investors inched up its stake by 5% to 742,700 shares.
Moreover, among the investors with new stakes in Precision Castparts Corp. (NYSE:PCP) as of the end of March, Lou Simpson’s SQ Advisors has the largest exposure to the company, holding 1.35 million shares worth $283.95 million, which represent 9.7% of its equity portfolio. 3G Capital, managed by Jorge Paulo Lemann, which worked with Buffett on several deals such as the acquisition of Kraft by Heinz, also increased its stake by 51% to 214,600 shares, which represent 3.84% of the equity portfolio.
On the other hand, several investors unloaded their positions untimely, including Rob Citrone’s Discovery Capital Management, which sold off its entire stake of 598,100 shares during the January – March period. Other funds that closed their positions during the same period include Steve Cohen’s Point72 Asset Management, Richard Chilton’s Chilton Investment Company, and Cliff Asness’ AQR Capital Management.
As stated earlier, the deal with Precision Castparts Corp. (NYSE:PCP) could require Berkshire to use around half of its available cash on hand, as of the end of June. In its latest 10-Q, the holding company also disclosed a revenue of $51.37 billion, versus $49.76 billion a year earlier and earnings of $2,442 per share, versus $3,889 delivered a year earlier. The decline in profits is attributed to the fall of investment gains, as well as underwriting losses from insurance operations, which represent a substantial part of Berkshire Hathaway.
Disclosure: none
