GE a less profitable bet for Buffett
BERKSHIRE Hathaway’s $3bn bet on GE during the 2008 financial crisis is proving less profitable than similar wagers on Goldman Sachs and BofA by chairman Warren Buffett.
BERKSHIRE Hathaway’s $3bn bet on General Electric (GE) during the 2008 financial crisis is proving less profitable than similar wagers by chairman Warren Buffett on Goldman Sachs Group and Bank of America Corporation.
Berkshire is poised to get about $260m in GE shares through warrants Mr Buffett received as part of a capital injection into Connecticut-based GE. Goldman Sachs this month turned over a $2.1bn stake to Berkshire tied to a similar bet. The GE contract expires today.
Mr Buffett buoyed some of the biggest US corporations as credit markets froze in 2008, helping GE and Goldman Sachs after the collapse of Lehman Brothers sparked the worst economic slump since the Great Depression. If Mr Buffett were to exercise warrants received as part of a 2011 investment in Bank of America, he could buy about $10bn of shares for $5bn.
“Buffett stepped in when everything was on fire with a way to keep from getting hot, and it has really paid off,” William Blair analyst Nick Heymann said. Berkshire will probably get more than 10million GE shares, according to a deal that uses the average closing price during a period of 20 trading days preceding the exchange.
Mr Buffett and GE amended the agreement so Berkshire will exercise warrants through a cashless transaction, passing on a chance to spend $3bn for shares at below-market prices. The revised agreement reduced the dilution for GE.
GE has fallen about 4.4% since September 30 2008, the day before the capital injection was announced, to trade at $24.38 at the market close in New York on Monday. Goldman Sachs, which got a $5bn investment from Mr Buffett in 2008, advanced 25% in that span to $159.46.
Berkshire received the GE warrants along with $3bn in preferred stock in exchange for an investment that helped CEO Jeffrey Immelt stabilise the company as credit losses mounted at the finance unit. His efforts to shrink GE Capital and boost earnings from industrial units helped the stock climb from a close of $6.66 on March 5 2009. GE paid $3.3bn in October 2011 to redeem Berkshire’s preferred stock, which had paid a 10% annual dividend.
“It was very opportunistic” for Berkshire, Fenimore Asset Management research director John Fox said. “You had a period of distress in the markets and low prices, and they put a lot of money to work.”
Bank of America agreed to give Mr Buffett a preferred stake and warrants for a $5bn investment in 2011. The 10-year contract allows Berkshire to buy 700-million shares at $7.14 apiece.