Buffett's Goldman deal is great -- for him
Posted
Sep 24 2008, 01:41 PM
by
Charley Blaine
Rating:
It's positively swell that Berkshire Hathaway's Warren Buffett has agreed to put $5 billion into Goldman Sachs. Especially for him.
Yes, the move is a way to show confidence in a beleaguered stock market and a beleaguered financial stock whose value has been cut nearly in half since October 2007. But make no mistake: He called the shots on this one. That’s what happens when you can put up $5 billion on a moment’s notice.
And because he can do that, he got a much better deal than you or I could get.
For its $5 billion, Berkshire Hathaway gets a perpetual preferred stock that pays a 10% annual dividend. That's a huge payout. The current dividend yield on Goldman’s common stock is 1.2%, and Goldman last year paid 6.2% on an existing issue of preferred stock.
In addition, Berkshire Hathaway received warrants to buy $5 billion in Goldman Sachs common shares at a strike price of $115 that can exercised at any time over the next five years. That means Berkshire can buy the shares at $115.
Goldman shares closed Wednesday at $133. So, if Buffett exercised his warrant at that price, Berskhire would still pay $115 and would immediately see a potential 16% return on its money.
Buffett doesn't want that. He wants to see the price of Goldman stock to go much higher. If it went to, say, $165, then the potential profit from his warrants would soar to some $2.1 billion -- a return of 43%.
If you bought the Goldman shares at $133 (and the company did sell $5 billion in common stock on Wednesday), your return would be 24%.
So Buffett comes out ahead on that score as well.
Admittedly, Buffett isn't perfect. His investment in Salomon Bros. was difficult; the company was ultimately sold. His acquisition of General Re, a reinsurance company, brought no end of problems. His investment in US Airways was a loser. Still, he wins a lot more than he loses.
So, the bottom line is this: Buffett may be the beloved, folksy Oracle of Omaha. But, boy, does he know how to cut a good deal -- for himself and his shareholders.
Related reading:
The problem with Warren Buffett
A look at Warren Buffett's holdings -- all of them
The FDR solution: Flashback to the 30s
Berkshire Hathaway won't bet against the dollar
