On Tuesday, Warren Buffett and Goldman Sachs (GS, Financial) issued a joint statement announcing an update to the warrants deal Buffett forged with the financial institutions. It was the latest development in Buffett’s lucrative investments he made in struggling companies during the financial crisis. Buffett's Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) originally invested in Goldman Sachs in September 2008, buying $5 billion worth of preferred stock, and receiving $5 billion in warrants to buy $5 billion worth of common stock in the next five years. In October, the U.S. Treasury also purchased $10 billion in Goldman’s preferred stock as part of the Troubled Asset Relief Program (TARP).
Buffett commented only briefly on the investment in his 2008 investor letter, saying it was one of three similar deals that year:
“On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus,” he wrote.
Almost five years later, as the warrants reach expiration in October 2013, the parties have amended the deal from the right to purchase 43,478,260 shares of common stock, par value $0.01 per share, with an exercise price of $115, to “the number of shares of common stock equal in value to the difference between the average closing price over the 10 trading days preceding Oct. 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant (43,478,260).”
In other words, if Buffett exercised his warrants at $115 on Tuesday, when shares trade for $146, he would make a $1.35 billion profit. Instead, Goldman would give him approximately 9.23 million shares of the company – the equivalent value of cash, except in shares. Depending on the price in October, the deal will likely place Buffett as a long-term, top 10 shareholder in Goldman Sachs and make it approximately 12 or 13th largest holding. Sachs’ largest fund owner is value guru Dodge & Cox.
"We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago," Buffett said the statement.
The amended deal will also allow Berkshire to benefit from Goldman’s 1.31% dividend yield, which equaled $0.50 per share in the fourth quarter of 2012.
Buffett’s deal-making with Goldman is reminiscent of his Bank of America (BAC, Financial) investment. In August 2011, Buffett received warrants to purchase 700 million shares of the bank at an exercise price of $7.14 per share in the next 10 years as part of a $5 billion investment in the bank to impart liquidity as well as his vote of confidence. The $5 billion worth of the bank’s preferred stock he purchased as part of the deal carries a 6% dividend yield.
Bank of America’s share price has since traded up to $12.28 per share as of market close Tuesday.
“At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire,” Buffett wrote in his 2011 letter.
Buffett’s third crisis-era lifeline was to General Electric (GE, Financial) in October 2008. The company sold $3 billion in preferred stock to Berkshire Hathaway with a 10% dividend, callable after three years with a 10% premium. Along with that deal came $3 billion in common stock warrants with a strike price of $22.45 per share, and a five year deadline. GE increased its dividend to $0.19 per share in the fourth quarter, with a 3.1% dividend yield. As the expiration date on these warrants nears, Buffett has eked out only a margin profit on that part of the deal with GE’s share price closing for $23.12 per share on Tuesday after increasing nearly 17% in the past year.
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Buffett commented only briefly on the investment in his 2008 investor letter, saying it was one of three similar deals that year:
“On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus,” he wrote.
Almost five years later, as the warrants reach expiration in October 2013, the parties have amended the deal from the right to purchase 43,478,260 shares of common stock, par value $0.01 per share, with an exercise price of $115, to “the number of shares of common stock equal in value to the difference between the average closing price over the 10 trading days preceding Oct. 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant (43,478,260).”
In other words, if Buffett exercised his warrants at $115 on Tuesday, when shares trade for $146, he would make a $1.35 billion profit. Instead, Goldman would give him approximately 9.23 million shares of the company – the equivalent value of cash, except in shares. Depending on the price in October, the deal will likely place Buffett as a long-term, top 10 shareholder in Goldman Sachs and make it approximately 12 or 13th largest holding. Sachs’ largest fund owner is value guru Dodge & Cox.
"We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago," Buffett said the statement.
The amended deal will also allow Berkshire to benefit from Goldman’s 1.31% dividend yield, which equaled $0.50 per share in the fourth quarter of 2012.
Buffett’s deal-making with Goldman is reminiscent of his Bank of America (BAC, Financial) investment. In August 2011, Buffett received warrants to purchase 700 million shares of the bank at an exercise price of $7.14 per share in the next 10 years as part of a $5 billion investment in the bank to impart liquidity as well as his vote of confidence. The $5 billion worth of the bank’s preferred stock he purchased as part of the deal carries a 6% dividend yield.
Bank of America’s share price has since traded up to $12.28 per share as of market close Tuesday.
“At Bank of America, some huge mistakes were made by prior management. Brian Moynihan has made excellent progress in cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire,” Buffett wrote in his 2011 letter.
Buffett’s third crisis-era lifeline was to General Electric (GE, Financial) in October 2008. The company sold $3 billion in preferred stock to Berkshire Hathaway with a 10% dividend, callable after three years with a 10% premium. Along with that deal came $3 billion in common stock warrants with a strike price of $22.45 per share, and a five year deadline. GE increased its dividend to $0.19 per share in the fourth quarter, with a 3.1% dividend yield. As the expiration date on these warrants nears, Buffett has eked out only a margin profit on that part of the deal with GE’s share price closing for $23.12 per share on Tuesday after increasing nearly 17% in the past year.
See Warren Buffett’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Warren Buffett.
Also check out:
