Warren Buffet’s Goldman Sachs Deal Actually Starting To Look Good

Post by Sharat on March 25, 2009 · Under Business News, Featured Articles, Wealth Management, investments · Comment

Last October perhaps the world’s greatest investor whose nickname “The Sage of Omaha” makes him sound more like a wrestler than an investor invested US$5 billion in venerable investment bank Goldman Sachs.

At the time it looked opportunistic; Goldman looking for a marquee investor whose stamp of approval carried more weight with financial markets than anything it could ever say or do, Mr. Buffet picking up his much fabled wonderful stock at what looked at the time, a wonderful price.

For Berkshire Hathaway, it was a no lose deal, it bought a US$5 billion equity stake in perhaps the world’s best known investment bank and arguably the dominant player or alpha male of the industry, and for its money receives a guaranteed dividend of 10 per cent a year on its perpetual preferred shares.

For a kicker Goldman’s gave Berkshire 5 year warrants which give Berkshire the right to buy 43.5 million common shares of Goldman Sachs at a strike price of US$115 at any time before 2013.

After doing the deal banking stocks tanked, the crisis deepened, Goldman shares hit a low of US$47.41 on November 21st, and after writing an op-ed piece for the New York Times on why he buys America, Mr. Buffet came in for criticism.

His critics should have known better. Goldman Sachs shares have nearly doubled since its November low and closed on Monday at US$111.93. Mr. Buffet’s warrants could soon be in the money.

The Investment bank has had to change its business model, and reduce the amount of leverage it carries on its balance sheet, but some business areas are positively on fire with flow or client driven trading benefiting from wide spreads being charged and really bringing in the moolah.

Analysts are revising earnings estimates, and banking stocks have rallied, conceivably if Goldman stock hits US$150 a share, then Berkshire could exercise its warrants position for a profit of US$35 a share or a cool US$1.5 billion.

Mr. Buffets GE deal has not fared so well however. Berkshire got similar warrants in General Electric when Mr. Buffett invested in the industrial conglomerate on October. 16. The GE warrants can be exercised for an aggregate cost of $US3 billion, or $US22.25 a share.

GE shares closed at $USUS10.43, which means Mr. Buffett’s GE warrants remain deeply out of the money and unlikely to recover in the short term. GE needing to restructure its business radically, having lost its prized long term AAA credit rating, and overly reliant on financial services as a profits generator.

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