2012Turning Point? Buffett to Invest $5 Billion in Goldman
Second cash splash for Berkshire in a week; 'gold-plated vote of confidence'
Reuters
September 24, 2008
NEW YORK (Reuters) - Warren Buffett’s Berkshire Hathaway will invest $5 billion in Goldman Sachs, in a major boost for the Wall Street bank from perhaps the world’s best-known investor. “It’s a vote of confidence which is gold plated,” said Michael Holland, a money manager at Holland & Co in New York. “You don’t get better than this.”
Shares of Goldman rose 6.5% following the announcement, while Standard & Poor’s 500 futures gained 16 points. Berkshire will buy $5 billion of perpetual preferred stock that carries a 10% dividend. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9% stake in Goldman.
Goldman also announced on Wednesday it sold $5 billion of common stock, doubling the size of the public offering it announced late Tuesday. Goldman priced 40.65 million shares at $123 each for gross proceeds of about $5 billion. Goldman, which managed its own offering, said it has an option to sell an additional 6.10 million shares to handle excess demand.
The stock price of Goldman had fallen 50% from their record set last Oct 31, as credit markets tightened and investors worried about the viability of U.S. investment banks. On Sunday, Goldman said it would become a bank holding company, enabling it to accept deposits and killing the investment bank model that dominated Wall Street for decades.
Mr. Buffett, for his part, has built his reputation on investing in companies he considers undervalued. “Goldman Sachs is an exceptional institution,” Mr. Buffett said in a statement. “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Mr. Buffett was not available for immediate comment, according to Debbie Bosanek, who works in his Omaha, Nebraska office. “Clearly they are saying that Goldman is not only going to be a survivor, but that it is going to prosper in this new world of financial companies,” said Tim Ghriskey, chief investment officer of Solaris Asset Management.
Lloyd Blankfein, Goldman’s chief executive, in a statement called Mr. Buffett’s investment “a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position.” The investment is Mr. Buffett’s second major purchase in less than a week. On Thursday, Berkshire’s MidAmerican Energy Holdings affiliate agreed to buy power supplier Constellation Energy for $4.7 billion. Constellation took that bid over a higher offer led by French energy giant Electricite de France.
Goldman’s abandoning of the investment banking model has raised speculation it might merge with a commercial lender. Berkshire as of June 30 disclosed stakes in six major U.S. banking and financial services companies: American Express, Bank of America, M&T Bank, SunTrust Banks, U.S. Bancorp and Wells Fargo. The latter was Berkshire’s largest equity investment other than Coca-Cola.
U.S. Bancorp spokesman Steve Dale and Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. Bank of America last week announced plans to buy another Wall Street investment bank, Merrill Lynch. The other companies did not immediately return calls seeking comment. Perhaps Mr. Buffett’s most famous foray into Wall Street came in 1991, when he became interim chairman at Salomon, a major Berkshire investment, to help it clean house following a Treasury market scandal. It was not one of Mr. Buffett’s better investments.
“I don’t know if it’s a statement on all the financials or the market,” said Marshall Sonenshine, chairman of Sonenshine Partners in New York, referring to the Goldman investment. “He sees Goldman Sachs as a good value where it’s currently priced. Remember, he invested in Salomon Brothers in the past, and that wasn’t a sign that Salomon was going to start doing well.”
Mr. Buffett may have reason to believe otherwise, said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York. “The valuation is great, and with what the government’s doing to unfreeze debt markets, it’s a great time to be buying,” he said.
Sonenshine Partners is a leading independent investment bank focused on providing integrated strategic, financial and corporate advisory services. The firm was founded in 2000 and is headquartered in New York City.