Berkshire Hathaway Explores Merger Arbitrage with Verizon’s Frontier Deal

Recently, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the $1.1 trillion holding company with a diverse portfolio, released its annual report. The report highlighted a record cash reserve of $334 billion in cash, cash equivalents, and U.S. Treasury bills. Warren Buffett, the CEO and chairperson of Berkshire Hathaway, could potentially deploy some of this cash through merger arbitrage—a strategy that involves purchasing stocks of companies trading below their acquisition price.

Verizon‘s (NYSE: VZ) pending $20 billion acquisition of Frontier Communications Parent (NASDAQ: FYBR) presents such an opportunity. This article will explore why Buffett, known for his long-term investing philosophy, considers this tactic and whether Frontier Stock is a worthy investment.

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Berkshire Hathaway’s Historical Merger Arbitrage Activities

Despite being celebrated for his long-term investment strategies, Buffett has engaged in merger arbitrage for over 30 years, demonstrating this with three significant deals in the past decade.

Berkshire Hathaway gradually acquired shares of Monsanto Co. between 2017 and 2018, following the acquisition announcement by Bayer AG. Subsequently, Buffett pursued another merger arbitrage opportunity when IBM announced its plan to acquire Red Hat at $190 per share in 2018 and 2019. Most recently, in 2022, Berkshire increased its stake in Activision Blizzard after Microsoft revealed its acquisition intentions.

In all three cases, the acquiring firms paid entirely in cash, and all deals concluded successfully. At a recent annual meeting, Buffett noted that these established firms generated significant “spreads”—the difference between the stock’s trading price and the buyout price—due to regulatory risks, yet there were no concerns regarding their ability to finance the deals.

For Verizon, which has a net debt of $143 billion, the focus in this all-cash merger should be on the company’s ability to secure funds. With a market capitalization of $180 billion and $12 billion in unused revolving credit, Verizon should comfortably meet its cash requirement for the acquisition.

Image source: The Motley Fool.

The New Merger Arbitrage Opportunity

In September 2024, Verizon announced its plan to acquire Frontier in an all-cash deal valued at approximately $20 billion, translating to $38.50 per share. The management teams anticipated an 18-month timeline for obtaining approvals from Frontier’s shareholders and regulatory agencies.

Currently, Frontier Stock is trading at $36 per share, creating a spread of 6.9%. To determine whether Berkshire will engage in this merger arbitrage, Buffett’s criteria from his 1988 annual shareholder letter are essential:

“To evaluate arbitrage situations, you must answer four questions: (1) How likely is it that the promised event will indeed occur? (2) How long will your money be tied up? (3) What chance is there that something still better will transpire—a competing takeover bid, for example? and (4) What will happen if the event does not take place because of antitrust action, financing glitches, etc.?”

The first hurdle has been cleared with Frontier’s shareholders approving the merger in November. However, final approval is still pending from regulators in the 24 states Frontier operates, as well as Washington, D.C., and national agencies.

Verizon’s management believes this merger will positively impact customers, with CEO Hans Vestberg expressing confidence in the deal’s approval, stating, “We are very confident that this will go through, but we expect a thorough process.”

Regarding the timeline, analysts estimate around 12 months remain, and the current 6.9% return appears more attractive than Treasury bills, which yield approximately 4% to 4.3%. It’s important to highlight that if the deal finalizes, it will activate a tax event for investors, and if the process extends beyond 12 months, it could potentially offer a more favorable tax rate than if it were less than 12 months.

As for a competing bid, it seems unlikely given that Frontier’s shareholders have already given their approval for Verizon’s offer.

If regulatory issues prevent the deal from closing, Frontier’s Stock price might decrease. Nonetheless, Verizon may be obligated to pay a $590 million breakup fee to Frontier in such an event.

Evaluating Frontier Communications for Arbitrage

In summary, Buffett’s position on merger arbitrage was encapsulated in his 1989 letter, where he stated, “We will engage in arbitrage from time to time—sometimes on a large scale—but only when we like the odds.”

In this instance, Frontier may fulfill Buffett’s criteria. Investors will gain a clearer view when Berkshire Hathaway discloses its holdings in the upcoming 13F filings, which report on the company’s stock positions.

For individual investors, Frontier Stock offers both stability and potential upside in a somewhat volatile market. For those averse to risk or bearish about short-term market trends, Frontier represents a compelling merger arbitrage opportunity.

Should You Invest $1,000 in Frontier Communications Parent Now?

Before considering an investment in Frontier Communications Parent Stock, keep in mind the following:

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Collin Brantmeyer has positions in Berkshire Hathaway and Microsoft. The Motley Fool has positions in and recommends Berkshire Hathaway, International Business Machines, and Microsoft. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.