Buffett’s Crisis Investments Result in Huge Payout
Warren Buffett and his company, Berkshire Hathaway (NYSE:BRKB)(NYSE:BRKA), will become one of the 10 largest holders of Goldman Sachs (NYSE:GS) stock, the bank said in an announcement on Tuesday. The best part of the deal? Buffett acquired the shares more or less free of charge.
In an exchange with Goldman Sachs, Buffett saves an enormous amount of money — billions of dollars — in upfront capital, and in return, Goldman can minimize the dilution of its shares. The story stems back to 2008, under a deal that gave Buffett the right to 43.5 million shares of stock at an exercise price of $115. Goldman said it will now give Berkshire shares reflecting the difference between the warrants’ original exercise price of $115, and the average closing price of Goldman’s stock for the 10 trading days up to October 1, Reuters reported. Goldman shares rose 0.9 percent to $147.43 in early trading.
At that price, the way the deal is structured would imply that Berkshire would receive 9.6 million Goldman shares, and make Buffett the ninth-largest investor in the firm.
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” Goldman Sachs CEO Lloyd Blankfein said in a statement.
The warrants were originally issued to Berkshire in 2008, as a vote of confidence in the bank as the recession took its toll on Wall Street. Between the premiums that Goldman paid when they repurchased preferred stock from Buffett in March of 2011, the dividends the preferred stock paid while he held them, a special dividend at the time of redemption, and the paper profit on the shares from the warrant deal, Buffett will potentially have made a profit of nearly $4.7 billion on his original $5 billion investment, Reuters said.
This is not Buffett’s only foray into this type of investment, either. Buffett made other similar investments with equally positive financial outcomes with other banks when Wall Street was floundering though the financial crisis. Buffett also invested $5 billion in warrants for 700 million Bank of America (NYSE:BAC) shares over 10 years in 2011, when shares were running about $7.14 a piece. The shares closed Monday at $12.40
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