Warren Buffett 's long-term horizon has enabled him to continue to benefit from deals made five years ago during the financial crisis. GuruFocus Real Time Picks shows that this week his company, Berkshire Hathaway ( BRK.A )( BRK.B ), became 2.8% owner of Goldman Sachs ( GS ) by converting warrants he purchased when the investment bank was verging on meltdown in 2008.
At the time, Buffett became savior to a number of faltering institutions by infusing both cash and his impeccable reputation through similar deals such as with Bank of America ( BAC ), GE ( GE ) and Dow Chemical ( DOWB ).
Buffett's cash commitment toward his crisis-era deals totaled $14.5 billion, he said in his 2008 letter. He had to sell stock in his holdings in Johnson & Johnson ( JNJ ), Procter & Gamble ( PG ) and ConocoPhillips ( COP ) to generate the capital to make them.
"We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus," Buffett wrote.
In the original Goldman Sachs deal, Buffett invested $5 billion for the bank's preferred stock and received $5 billion in common stock, strike price $115 per share. He had five years to exercise the warrants, which carried a 10% dividend.
Then, in March 2013, the two parties amended the deal from a cash settlement to a net share settlement. In other words, instead of giving Berkshire Hathaway the right to purchase 43,478,260 shares at an exercise price of $115 before Oct. 1, 2013, Goldman would instead give him the number of shares equal to the value to the difference between the average closing price of the 10 trading days leading up to Oct. 1, 2013 and the exercise price multiplied by the 43,478,260 shares the warrants granted.
This stake was smaller than it would have been in the initial deal, but did not require Buffett to spend any money to exercise the warrants. As disclosed on Oct. 8, the stake given in the amended deal totaled about 13.06 million shares, making Berkshire the six-largest external shareholder in the company.
In 2011, Goldman redeemed another 50,000 shares of preferred stock with a 10% cumulative dividend at a price of $110,000 per share that Berkshire purchased concurrently with the warrants. Goldman paid Buffett $1.64 billion in one-time preferred dividends at the time of redemption.
Goldman Sachs shares trade around $154.69 on Wednesday, up approximately 21% since Buffett made the deal with the company on Oct. 1, 2008.
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