In sports, sometimes athletes become so widely known for being underrated that they slowly swing to overrated. I know that sounds strange and contradictory, but anyone who’s watched sports for a serious amount of time knows that it’s true.
It starts off with a couple of announcers saying something like, “This guy has been getting it done under the radar for a couple of years now.” Slowly, fans start to recognize him and properly rate him, and then all the sudden everyone is talking about how great the guy is. A guy who’s been playing at a borderline all star level for a couple of years is suddenly being talked up by the press and fans like he’s one of the best in the game, an MVP contender and the cornerstone of a franchise. After a bit, the serious fans start to point out to everyone that the guy is good, but there’s no way he can possibly live up to the lofty levels that everyone has set for him. Then that rumor spreads, and all of the sudden everyone knows him as the guy who is way overrated.
Frankly, I think that’s what happened this year with Warren Buffett. Don’t get me wrong, he’s the greatest investor ever and it’s very tough to overrate him. But coming out of the financial crisis, his reputation was so good that he was almost considered a god (the “everyone knows how underrated this guy is” portion). Suddenly, this year, with BYD’s stock price coming down, Sokol-gate, and now the investment in Bank of America (BAC, Financial), he passed the point where rational observers would tell you “he’s only human” and slowly reaching the point where everyone is saying “this guy is overrated.”
Ok, ok, maybe not a perfect analogy, but it gets my point across.
Let’s be honest: Warren Buffett likely fleeced BofA (though that doesn’t necessarily mean BofA got a bad deal). He’s the greatest investor of all time, and he saw an organization with tons of headline risk where he could lend them his credibility to help them get past the markets fears and make a killing for himself in the process. That’s why I’m absolutely shocked by the negative comments that are slowly starting to bubble out from this deal. It’s really tough to understand how anyone could criticize this deal (outside of maybe the “Buffett uses his connections to strike up another sweetheart deal no one else could make” angle… but all of us wish we had that ability).
When I first saw the deal, I did some very rough numbers and figured Buffett had probably purchased a package worth approximately $7 billion for $5 billion. After reading a couple of blog posts(see here and here), it looks like the actual figures work out closer to $6-$6.5 billion, but however you cut it, a very nice deal for Buffett with serious upside. So BAC “gave” Buffett $1 billion or so.
What did it get in return?
Oh, only a $7 billion boost to its market cap, some tightening in its bonds and CDS spreads, and increased value to its preferred. All in, I bet they added about $15 billion or even more to their enterprise value today.
Remember, this is a company that needs to access the financial markets to remain in business. We saw with Bear Sterns that when the market doesn’t trust you, you die quickly. This deal can and does increase the market value of Bank of America. Management made a smart call — they paid Warren $1 billion and increased their EV by $15 billion. I’d take that deal from both sides any day and twice on Sunday.
So both sides gained from the deal, and the country as a whole gained because Bank of America, one of the largest institutions in the world, will likely go on living. So, in the truest sense of the words, everyone won. How in the hell can this deal draw any criticism???
Say what you want about Buffett (and trust me, though he’s admittedly an idol of mine, I’m more than willing to point out his numerous flaws and mistakes), but I don’t understand how anyone can criticize this one.
It starts off with a couple of announcers saying something like, “This guy has been getting it done under the radar for a couple of years now.” Slowly, fans start to recognize him and properly rate him, and then all the sudden everyone is talking about how great the guy is. A guy who’s been playing at a borderline all star level for a couple of years is suddenly being talked up by the press and fans like he’s one of the best in the game, an MVP contender and the cornerstone of a franchise. After a bit, the serious fans start to point out to everyone that the guy is good, but there’s no way he can possibly live up to the lofty levels that everyone has set for him. Then that rumor spreads, and all of the sudden everyone knows him as the guy who is way overrated.
Frankly, I think that’s what happened this year with Warren Buffett. Don’t get me wrong, he’s the greatest investor ever and it’s very tough to overrate him. But coming out of the financial crisis, his reputation was so good that he was almost considered a god (the “everyone knows how underrated this guy is” portion). Suddenly, this year, with BYD’s stock price coming down, Sokol-gate, and now the investment in Bank of America (BAC, Financial), he passed the point where rational observers would tell you “he’s only human” and slowly reaching the point where everyone is saying “this guy is overrated.”
Ok, ok, maybe not a perfect analogy, but it gets my point across.
Let’s be honest: Warren Buffett likely fleeced BofA (though that doesn’t necessarily mean BofA got a bad deal). He’s the greatest investor of all time, and he saw an organization with tons of headline risk where he could lend them his credibility to help them get past the markets fears and make a killing for himself in the process. That’s why I’m absolutely shocked by the negative comments that are slowly starting to bubble out from this deal. It’s really tough to understand how anyone could criticize this deal (outside of maybe the “Buffett uses his connections to strike up another sweetheart deal no one else could make” angle… but all of us wish we had that ability).
When I first saw the deal, I did some very rough numbers and figured Buffett had probably purchased a package worth approximately $7 billion for $5 billion. After reading a couple of blog posts(see here and here), it looks like the actual figures work out closer to $6-$6.5 billion, but however you cut it, a very nice deal for Buffett with serious upside. So BAC “gave” Buffett $1 billion or so.
What did it get in return?
Oh, only a $7 billion boost to its market cap, some tightening in its bonds and CDS spreads, and increased value to its preferred. All in, I bet they added about $15 billion or even more to their enterprise value today.
Remember, this is a company that needs to access the financial markets to remain in business. We saw with Bear Sterns that when the market doesn’t trust you, you die quickly. This deal can and does increase the market value of Bank of America. Management made a smart call — they paid Warren $1 billion and increased their EV by $15 billion. I’d take that deal from both sides any day and twice on Sunday.
So both sides gained from the deal, and the country as a whole gained because Bank of America, one of the largest institutions in the world, will likely go on living. So, in the truest sense of the words, everyone won. How in the hell can this deal draw any criticism???
Say what you want about Buffett (and trust me, though he’s admittedly an idol of mine, I’m more than willing to point out his numerous flaws and mistakes), but I don’t understand how anyone can criticize this one.
