Berkshire Hathaway Will Invest Billions in Goldman Sachs

goldman sachs logo and warren buffett speaking into the microphoneWarren Buffett continued his buying rampage on Tuesday by securing himself and the rest of the Berkshire Hathaway shareholders a sweetheart deal with Goldman Sachs.

The deal will see Warren Buffett buy $5 billion dollars of perpetual preferred stock that will pay a dividend of 10%. Also, the stock is callable at anytime at a 10% premium, meaning that Goldman Sachs could buy them buy at the higher price.

In addition to that, Berkshire Hathaway (the conglomerate that Warren Buffett built) will receive warrants to purchase five billion dollars worth of Goldman Sachs with a $115 strike price. These warrants are exercisable anytime over the next five years. Goldman Sachs is currently trading at $135 in afterhours trading - if Warren Buffett exercised his warrants tomorrow, then he could buy five billion dollars worth of Goldman Sachs at $115, even though the stock was trading 20 points higher.

Let's do the math on this deal so you can see what a great deal that it is for Warren Buffett and company.

Let's start with the warrants. A warrant is a security that entitles a person or company (in this case, Berkshire Hathaway) to buy a stock at an agreed-upon price (in this case, $115 per share). There is no obligation to buy, so if Goldman Sachs plummets and trades at $20, Warren Buffett is not obligated to purchase any of the shares. However, if Goldman Sachs recovers and trades up to $200, then Warren Buffett and Berkshire Hathaway can exercise their right to purchase $5 billion dollars worth of shares at $115.

After the Goldman Sachs / Warren Buffett announcement, there was an unsurprising afterhours pop in the stock. Berkshire Hathaway has the right to purchase about 44 million shares of Goldman Sachs at $115 per share - if he exercised the warrants tomorrow morning, Berkshire Hathaway would already be up nearly a hundred million dollars on the deal.

Now onto the preferred stock that Berkshire Hathaway purchased.

As mentioned, this preferred stock will pay a dividend of 10%. This means that in exchange for buying the preferred shares, Berkshire Hathaway will receive annual dividend payments of $500 million dollars. Also, as mentioned, the shares are callable by Goldman Sachs with a 10% premium.

Warren Buffett apparently started entertaining the idea of investing in Goldman Sachs after they converted to a bank holding company and would therefore be subjected to more oversight.

Buffett is on a buying spree right now, and this surely won't be the last purchase. Given the extremely fearful mood of the market and a great number of companies (especially those in the financial sector), this would seem to be a perfect opportunity for Berkshire Hathaway to swoop in and scoop up a great number of deals.

Filed under: The Economic Meltdown | General Market News

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