Buffett still knows how to deal
Buffett is a master at buying low and selling high. This is what was announced on Tuesday (September 23) evening… keeping in mind that Goldman closed at $125/share.
The Goldman Sachs Group, Inc. (NYSE: GS – News) announced today that it has reached an agreement to sell $5 billion of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. In conjunction with this offering, Berkshire Hathaway will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, which are exercisable at any time for a five year term.
Let’s work the terminology here:
1. Perpetual = Forever
2. Preferred Shares = In case if Goldman goes belly-up, Buffett will be in line to pick up the cash first before the common shareholders.
3. Dividend of 10% = The yield of this “investment” is 10% a year.
4. Callable at a 10% premium = Goldman, if they have $5.5 billion in money lying around, can give it back to Buffett to pay off the $5 billion he loaned them.
5. Warrants to buy $5 billion in shares at $115/share = This here is about worth $2 billion alone if you liquidated the time value of these warrants at present prices.
So what do we have here?
At a very minimum (if Goldman does not go belly-up), Buffett will net about $2.5 billion on this investment. At a very maximum, if Goldman actually survives, Buffett will net much more due to the warrants.
The worst case scenario here is that Goldman will go belly-up and Buffett will take a 3 billion dollar hit. But I bet you he’s already starting to hedge the value of his Goldman warrants.
I wish I will be as sharp as him when I’m 77 years of age.
I think part of it is his sharpness, but certainly a large portion of it is that he’s almost always dealing from a position of strength (obviously accrued from years of sharp deals like this, true) and can take or leave any deal without it really causing him grief. Not too many people or firms are in that position, and I’d have to say that it’s his patience that allows for it — other people, with mountains of cash, are too willing to churn it and “make things happen”.