Berkshire Hathaway, owned by Warren Buffet has given up an opportunity to become the biggest shareholder in Goldman Sachs Group. It was supposed to take stock instead of cash profits. Berkshire held warrants and that allowed it to buy 43.5 million of Goldman Sachs common shares, each being priced at $115 until 1st October. However, the companies announced revised terms on today and it says that Berkshire will be getting stock equal to the difference between the average closing price during the 10 trading days preceding to 1st October and exercise price, multiplied by 43.5 million.
This new deal is expected to eliminate at least some risk for Berkshire. Otherwise, it would have had to spend around $5 billion for exercising the warrants and then end up selling the shares for cementing a profit. Goldman Sachs, incidentally, is the 5th biggest bank in the world and this new plan seals participation of Berkshire as a shareholder in it and also decreases the dilution for other investors.
According to Richard Cook, who works as the Co-Founder of Cook & Bynum Capital Management LLC, considerable amount of transactional cost would have to be faced by Berkshire if they had to buy the 43 million and then sell those for reaping the profit. Cook added that with help of the new plan, Goldman has been able to avoid dilution.
Goldman Sachs was more or less unchanged on today and each share costs $146.02 now. The bank has gained around 14% in 2013 till date; it experienced an increase of 41% even in last year.
Warren Buffet incidentally is a cult figure when it comes to the investing world. Goldman Sachs turned to him for shoring up the capital and restore market’s confidence as its stocks experienced decline leading to spike in the borrowing costs since 15th September, 2008. As the news of Berkshire’s investment came out, Goldman Sachs was able to raise $5.75 billion from a stock offering held in just 2 days.
Lloyd C. Blankfein, who is the Chairman and Chief Executive Officer of Goldman Sachs, stated that he is extremely happy to see Berkshire as a long term investor for the company. At the end of last year, the cash hoard of Berkshire was around $47 billion. As of 1st February, partners of Goldman Sachs own around 57.8 million shares.