On September 24, 2008, Berkshire Hathaway and Goldman Sachs entered into an agreement in which Berkshire Hathaway purchased $5 billion of Goldman’s preferred shares paying a 10% dividend. Berkshire also received warrants granting it the right to buy $5 billion of Goldman Sachs common stock at $115 per share (or 43.5 million shares) through October 1, 2013.
Goldman Sachs called the preferred stock for redemption on April 18, 2011 at a premium of 10% over par value, plus accrued and unpaid dividends. As a result, Berkshire Hathaway earned approximately $1.75 billion ($1.25 billion in dividends plus a redemption premium of $500 million) in 2½ years on its investment of $5 billion. This represents a return of 35% over this time period from the preferred stock alone.
On March 26, 2013, Goldman Sachs announced a modification of this agreement with respect to the warrants. The new arrangement stipulates that instead of Berkshire investing $5 billion in Goldman on October 1, 2013, and owning about 10% of its shares, Berkshire would not invest any additional capital in Goldman but would receive Goldman shares representing the profit above the exercise price of $115 on October 1, 2013. At Goldman’s current price of about $145, Berkshire would own about 2% of Goldman with a market value of $1.3 billion. This arrangement would be beneficial to both Goldman and Berkshire. The amount of dilution in Goldman shares would be substantially reduced from 10% to 2%. Berkshire would not only be retaining $5 billion in capital, but also committing only $1.3 billion to this investment (not $6.3 billion = $5 billion + $1.3 billion). Warren Buffett has promised that the exercise of the Goldman warrants would result in a long-term investment for Berkshire.
I am quoted in two Wall Street Journal articles (March 27, 2013) on this topic:
Mr. Buffett is “risking less money,” said David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland. “I don’t know if that’s an indication of having less confidence, but he’s made a decision to put less capital at risk.”
“Goldman was an excellent investment even before today, and the shares he’ll get going forward will work out for him very well,” said David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland who follows Berkshire Hathaway. “But the Bank of America investment is just off the charts.”