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Warren Buffett

Warren Buffett Buys Share of Goldman Sachs

September 24, 2008 12:03 PM
by Anne Szustek
Buffett’s Berkshire Hathaway is acquiring almost 10 percent of Goldman Sachs, signalling the financial guru’s confidence in the investment bank turned holding company.

Buffett's Latest Investment a "Thumbs Up" to Financial Sector

Buffett and Berkshire are buying up $5 billion in Goldman Sachs “perpetual” preferred stock. According to The Wall Street Journal, “These are not convertible into equity but pay a fat 10% dividend.” The dividend will hold at that payout level regardless of any poor stock performance.

The Omaha, Neb., conglomerate also obtained warrants for another $5 billion in Goldman common stock at $115 per share, a discount of 8 percent from Tuesday’s closing price of $125.05.

The deal is testament to Buffett’s faith in a market roiled by bankruptcies, mergers and commodities shocks.

“Goldman Sachs is an exceptional institution,” Buffett said in a news release. “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Sen. Charles Schumer, D-N.Y., called Buffett’s stock acquisition “a vote of confidence not only in Goldman but in Washington’s commitment to come up with a plan,” he was quoted as saying in The Wall Street Journal.

In light of the news of the stock acquisition, which broke late Tuesday, Goldman’s price-per-share rose by 6.5 percent during Wednesday premarket trading, up $8.15 to $133.20.

Goldman is also planning to launch its own $2.5 billion public stock offering. Should the shares get snapped up, Buffett’s stake would drop to some 7 percent, assuming he has purchased the common stock.

This is just among the latest moves by Buffett and Berkshire to step in with capital to bolster business deals. Dow Chemical agreed July 10 to take over specialty chemical firm Rohm & Haas for $18.8 billion, marking a 74 percent premium over the previous day’s closing share price. Berkshire Hathaway became the chemical titan’s largest shareholder after putting $3 billion toward the buyout.

In April, the conglomerate lent $4.4 billion in debt financing to confectioner Mars for its $23 billion purchase of Wm. Wrigley Jr. Co, as well as buying a $2.1 billion minority stake in the chewing gum giant.

Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals,” writes Money Morning. The deal between Mars and Wrigley, both name-brand candy companies, “fits the bill”—and is roughly analogous to the chemical duo of Dow and Rohm & Haas.

The Wrigley takeover “also shows how the debt market has shifted to cause acquirers to back deals with more funds,” writes Mergers Unleashed.

But, of course, those are companies offering tangible products. According to The Wall Street Journal, Buffett normally has been wary of putting money toward investment banks. In 1987, shortly before the Black Monday stock market crash, Berkshire bought $700 billion in preferred stock of investment house Salomon Brothers, Inc.

Nearly four years later, Buffett moved in as Saloman's interim chairman in August 1991 after then-Chairman John Gutfreund was forced to resign amid the firm’s Treasury bond bidding scandal. Buffett stepped down from the post in 1992.

The financier twice passed on investing in hedge fund Long-Term Capital Management: once in 1993, and again in 1998 as the company was flailing. He eventually did join forces with AIG and Goldman to buy up the hedge fund.

But, according to sources, Buffett has had a fascination with Goldman since he visited the firm with his father at age 10. And Lloyd Blankfein, the current chair and CEO of Goldman, visited with Buffett soon after assuming the post of company president in 2003.

Background: Credit crunch devastates lenders, Berkshire Hathaway investment activity

Credit crisis hits lenders hard
Berkshire Hathaway’s recent investments

Opinion & Analysis: Mergers and acquisitions help Berkshire navigate tough market


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