On Monday, Warren Buffett's
Berkshire Hathaway Inc.
) exercised its revised warrant agreement with
The Goldman Sachs Group Inc.
) for a net share settlement as of Oct 1, 2013.
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As per the amended agreement, Goldman delivered Berkshire
Hathaway the number of shares of common stock, which was equal in
value to the difference between the average closing price of
Goldman's common stock over the 10 trading days prior to Oct 1,
2013 and the exercise price of $115 multiplied by 43.5 million
shares covered under the warrant.
Specifically, Berkshire Hathaway received 13.1 million shares
worth $2.15 billion and became the sixth largest external
investor in Goldman with 2.91% stake. Moreover, the revised
agreement lowered the dilution for Goldman's shareholders and
Buffett gained without deploying more funds.
During the latest financial crisis, Berkshire invested $5 billion
in Goldman. Buffett's investment followed the collapse of Lehman
Brothers and the government's bail out of
American International Group Inc.
) during the crisis.
In Mar 2011, Goldman redeemed preferred shares worth $5 billion,
the investment made by Warren Buffett. According to the deal,
Goldman paid 10% interest on preferred shares annually,
representing an annual expense of $500 million before the
redemption. Further, the redemption amount stood at $5.65
including 10% premium on investment, $125 million first-quarter
2011 dividend and $24 million in accelerated dividends. While the
redemption came at a high price, it reduced expenses for Goldman.
After the redemption, Berkshire continued to hold warrants to buy
43.5 million common shares of Goldman at $115 per share before
2013. Notably, exercising these warrants would have awarded
around 9% stake to Berkshire in Goldman. However, the agreement
was revised in Mar 2013 and the cash settlement was changed to
net share settlement as mentioned above.
Like Goldman, Buffett also invested $3 billion in
General Electric Co.
) preferred stock in 2008 and still holds warrants to purchase $3
billion of common stock with a strike price of $22.25 per share
expiring on Oct 16, 2013. On the whole, Buffett succeeded in its
motive to gain on investments from troubled banks during the
Fundamentally, we expect Goldman to benefit from its well managed
global franchise, strong capital base and industry leading
position in trading and asset management. Goldman's prudent
business model and strong fundamentals are expected to deliver
better earnings in the upcoming quarters. Currently, Goldman
carries a Zacks Rank #3 (Hold).