2011-03-20 07:23:00
Berkshire Hathaway Currently Up $3.7 Billion on Their Investment in Goldman Sachs
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At the height of the financial meltdown of 2008, Berkshire Hathaway made a $5 billion investment in Goldman Sachs that was a major vote of confidence for the reeling financial firm.
Earlier this week, Goldman Sachs received permission from regulators to spend $5.65 billion to buy back Berkshire Hathaway's investment.
The reason? Berkshire Hathaway's preferred shares in Goldman Sachs entitled the conglomerate to an annual dividend of $500 million. That's a great deal of money to be paying out each and every year, and Goldman Sachs finally decided that they had had enough. An annual dividend of $500 million translates into nearly $1.4 million a day, or $16 every second.
Warren Buffett is naturally bummed out that Goldman Sachs is buying Berkshire Hathaway out of their position, but don’t feel too bad for the "Oracle of Omaha" - Berkshire Hathaway and its shareholders made out very well in this investment.
How well?
To start, Berkshire Hathaway received approximately $1.25 billion in dividends from Goldman Sachs from the fall of 2008 until now.
On top of that, Berkshire Hathaway is receiving a $500 million early repayment fee from Goldman Sachs, in addition to the return of their original $5 billion investment. We're up to a profit of $1.75 billion for Berkshire Hathaway.
Lastly, Berkshire Hathaway still holds warrants to buy 43.5 million common shares of Goldman Sachs at a price of $115 per share anytime before the fall of 2013. Goldman Sachs is currently trading at $160 per share, so that is an additional unrealized profit of $1.96 billion. (note: Buffett has indicated that he probably won't cash in on these warrants until sometime near the 2013 deadline).
So, as it stands right now, Berkshire Hathaway is up roughly $3.7 billion on their original $5 billion investment. That's a 74% return in roughly 2 1/2 years - quite the return, even for the famed Warren Buffett.
Sure, Berkshire Hathaway certainly received a sweetheart deal from Goldman Sachs in the fall of 2008. Why wouldn’t they have? Combine a reputation that has taken a lifetime to cultivate with a reeling firm's desperate need for a vote of confidence (and capital) during a very black time for the global economy, and boom - a sweetheart deal for Berkshire Hathaway was born. If you had the sterling reputation of Warren Buffett and $5 billion to invest, then you could have gotten the same deal as well.
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Warren Buffett bought when everyone else was selling during the fall of 2008, and it paid off big for Berkshire Hathaway.
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Filed under: General Market News
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