Goldman and Buffett scratch each other’s backs
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Goldman Sachs and Warren Buffett have found a way to scratch each otherâs backs – again. The mutual assistance started during the crisis when the Sage of Omaha stepped in with a $5 billion rescue investment in 2008 that provided him with a healthy 10 percent yield on Goldman preferred shares. Now, theyâre amending terms of warrants granted to Buffett in the same deal that also works well both ways.
The new agreement simplifies one entitling Buffettâs Berkshire Hathaway to buy 43.5 million Goldman shares for $115 apiece. Based on the current share price of about $146, that would have left the conglomerate $1.4 billion in the money and as Goldmanâs biggest shareholder with about a 9 percent stake.
The revised structure keeps Buffett in the black, assuming the stock doesnât tank between now and October. Now, however, he isnât obligated to shell out $5 billion to buy the stock. Instead, Berkshire will simply receive enough shares to cover the profit.
Without any outlay, Buffett can brag of an infinite return on the warrants. More practically, by not tying up the cash in Goldman, he can keep it in reserve for another Heinz-like elephantine acquisition target. Following the co-purchase of the ketchup maker, his reserves will dip by almost a third to about $30 billion.
Goldman, meanwhile, escapes some irritating side effects of the investment. It will no longer dilute shareholders as much. Instead of issuing 9 percent of new stock, based on Tuesdayâs price it should only need to issue about 2 percent.
It also means Goldman will suffer a lesser hit to its rate of return. The 43.5 million shares Buffett was due would have increased the bankâs common equity by 9.3 percent. Applied to expected 2013 earnings, as tallied by Thomson Reuters, the bankâs return on equity would have been primed to drop from 9.4 percent to an even more disappointing 8.6 percent.
Thereâs one more benefit for the bank led by Lloyd Blankfein. It will now have 34 million fewer shares to worry about negotiating with the Federal Reserve for permission to buy back. For Goldman, Buffettâs aid keeps on giving.