This is an indication that this is the right time to buy into the market. Legendary value investor Warren Buffet’s Berkshire Hathway will invest $5 billion in Goldman Sachs.
The global financial powerhouse said in a statement that Berkshire Hathway will invest $5 billion in preferred stock at a 10 per cent dividend and Goldman has the right to repurchase the preferred at any time by paying Berkshire a 10% premium.
Berkshire will also receive warrants worth $5 billion whch can be converted into common stock any time during the next five years at a strike price of $115 a share, which is 8% below Goldman’s closing share price on Tuesday of $125.05.
The deal, according to Wall Street Journal, will give Warren Buffet roughly an ownership of 10% in Goldman, which has a market cap of $50 billion according to the latest data.
Also part of Buffet’s entry is that, Goldman Sachs will raise at least $2.5 billion in common equity in a public offering, the statement said, which will be the first time it has sold shares since 2000. Once the IPO is done, Berkshire’s stake would fall about 7%.
“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects,” said Lloyd C. Blankfein, Chairman and CEO of The Goldman Sachs Group, Inc. “This investment will further bolster our strong capitalization and liquidity position.”
“Goldman Sachs is an exceptional institution,” said Warren Buffett, Chairman and CEO of Berkshire Hathaway, Inc. “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
The deal comes at a time when the Wall Street is going through the worst crisis in its history. Over the last month, Wall Street went through a series of events like the US government’s taking over of Fannie Mae and Freddie Mac, 158-year old Lehman Brothers Holdings Inc.’ filing for the bankruptcy under chapter 11, and the Fed’s bail out of American Insurance Group Inc.
Another large US investment bank Merrill Lynch sold itself to Bank of America, while Goldman and Morgan Stanley abandoned their Wall Street business model and turned themselves into commercial banks.
Also the Fed is planning a $700 billion bailout of the US financial system which is apparently coming under increasing fire from retractors.
The Goldman Sachs Group is now a bank holding company and a leading global investment banking, securities and investment management firm. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.