The Wall Street Journal reports that Warren Buffet plans to sink $5 billion into Goldman Sachs, a move that demonstrates a high level of confidence in our financial system, even as it suffers through this credit crisis.
Berkshire's plan "is a sign of confidence from one of the nation's most respected investors," said James Angel, a finance professor at Georgetown University, who added that "sharp investors" now are "sniffing around the wreckage of the credit crunch to pick up good assets on the cheap."
The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.
Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.
Goldman also will go to the public to raise at least a further $2.5 billion by selling common shares. Once it does, Berkshire's stake -- if it has exercised the warrants -- would fall to about 7%. Goldman will have the right to repurchase the preferred shares at any time for a 10% premium.
This move will undoubtedly boost the value Berkshire Hathaway stock. Buffets philosophical approach to investing is to proceed cautiously, buy into only those businesses he knows about, and buy with the intention of holding for the long term. Investors would do well to copy his strategy.
At the close of trading yesterday Berkshire Hathaway stock stood at $128,800.00 per share. When Buffett gained control of it in 1965, Berkshire Hathaway was a textile manufacturing firm with stock worth about $18 per share. Since then Berkshire Hathaway has diversified, but it has never issued a dividend and has never split. But, oh my has it ever grown.
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