Warren Buffett Buys Stake In Goldman Sachs
The Dynamic Wealth Report
September 26, 2008
$5 Billion . . . Not A Big Deal
Just last night I attended a financial seminar. I knew it was going to
be interesting. My first clue was the location. The seminar was hosted
in a tiny restaurant in a strip mall. A bagel shop to be precise. So
much for the glamour of “Wall Street.”
The food was decent and the presenter was entertaining. The topic
wandered a bit bouncing from the market, to insurance, to REITs. The
general question being answered was what to do now with your money.
What really caught my attention however was a comment from the
presenter.
It wasn’t anything big or earth shattering. But he said it several
times. I couldn’t get it out of my head. The comment?
“Warren Buffett just bought $5 Billion Dollars worth of Goldman Sachs
today!”
Maybe it was the way he emphasized the words $5 Billion Dollars. Maybe
it was the excitement in his voice – like he had just discovered a gold
mine. Maybe it was the fact he said it twice and his co-presenters said
it several times as well.
Or, maybe it was the Wall Street Journal running a front page story
about that very topic.
Whatever it was, the statement really bugged me.
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Look, I’m just like everyone else. Seeing a really smart investor step
up and put money on the table makes you take notice. Seeing an investing
giant like Warren Buffett do it is even more influential. I started
thinking about Buffett. You know, more than 10 years ago he wouldn’t
comment on his investments. He had a joke that he’d tell you but then
he’d have to kill you.
Now he’s interviewing with Wall Street Journal reporters and calling
into CNBC live.
I looked closely at this investment and it’s a no brainer. As a matter
of fact, I’d put my own money into Goldman on the same terms.
Does anyone happen to know the home phone number of Lloyd Blankfein the
CEO of Goldman Sachs (GS)? If you do, please let him know I’m interested
in investing on the same terms.
Seriously.
Why’s this investment a no brainer?
The structure of the deal is exciting. It’s an instant win for Buffett. It’s the closest thing you can get to a guarantee in the markets.
Buffett invests $5 billion dollars. Now that’s no small sum. I certainly
don’t have that much money. But he’s investing in a way you and I never
could. First he’s not buying stock on the open market. That $5 billion
isn’t going to flow onto Wall Street. Nope. He’s buying the stock right
from the company. That $5 billion is going right into the Goldman Sachs
bank account.
Second the security he’s buying is different. He’s not buying common
stock like you or I would. He gets a special class of stock. A
“Perpetual Preferred.”
What’s that mean?
Two things. First his perpetual preferred gives him seniority over the
common stock if, and it’s a big “if”, Goldman gets into trouble. Second
it pays him a dividend perpetually – or forever. And that dividend gets
paid to him before anything goes to the shareholders – that’s why they
call it preferred.
The dividend’s no small number either. He’s getting 10% on his
money. Keep in mind, the common stock's getting only a little more than 1% on
their dividend.
Warren can hold this investment forever . . . but if Goldman wants to
buy it back. Well, they have to pay him a 10% premium. Sounds pretty
good doesn’t it.
But wait. There’s more!
That’s right the sweetheart deal for Buffett isn’t over yet. Warren also
gets warrants on Goldman’s stock. Warrants are simply contracts giving
the owner (Buffett) the right to buy more common stock at a fixed price
for a certain amount of time. It’s like a call option but typically
longer term.
So Buffett gets warrants to buy another $5 billion worth of Goldman at
$115 a share anytime in the next 5 years. Sounds like a good deal to me
considering the stock price was much higher when the deal was being
struck.
Now before you dismiss this warrant, let me tell you something. This is
probably the most valuable part of the entire deal. Keep in mind that
today the stock’s over $136 a share and his profits will be huge.
How big?
We’ll let’s see here. $5 billion invested at $115 a share gives Warren
43,478,260 shares. And $136 less $115 gives a profit of $21 per share.
So $21 times 43.4 million shares (and change) means a profit of more
than $913 million.
A profit of $913 million on a $5 billion investment is 18.2%. That’s an
annual return of over 900%. Not bad for a week’s worth of work. I think
when all is said and done, Warren will make much, much more on his
investment. How? He’ll wait till the stock rebounds to its 52-week high
(of over $250 a share).
I’ll let you figure how much he makes then.
• National City (NCC) was upgraded to “Outperform” by Fox Pitt. This is a bold call given the current precarious state of the financial
markets.
• Research In Motion (RIMM) was downgraded by RBC and Deutsch
Securities. Just this week the company posted great numbers, but cut
forward EPS estimates.
• Stifel Nicolaus started research coverage on a number of airlines
including: AMR (AMR), Continental (CAL),
Delta (DAL),
Southwest (LUV), and UAL (UAUA). All received Buy ratings.
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