Warren Buffett Renegotiates Terms Of Goldman Sachs Warrants

On September 24, 2008, Berkshire Hathaway and Goldman Sachs entered into an agreement in which Berkshire Hathaway purchased $5 billion of Goldman’s preferred shares paying a 10% dividend. Berkshire also received warrants granting it the right to buy $5 billion of Goldman Sachs common stock at $115 per share (or 43.5 million shares) through October 1, 2013.

Goldman Sachs called the preferred stock for redemption on April 18, 2011 at a premium of 10% over par value, plus accrued and unpaid dividends. As a result, Berkshire Hathaway earned approximately $1.75 billion ($1.25 billion in dividends plus a redemption premium of $500 million) in 2½ years on its investment of $5 billion. This represents a return of 35% over this time period from the preferred stock alone.

On March 26, 2013, Goldman Sachs announced a modification of this agreement with respect to the warrants. The new arrangement stipulates that instead of Berkshire investing $5 billion in Goldman on October 1, 2013, and owning about 10% of its shares, Berkshire instead would not invest any additional capital in Goldman but would receive Goldman shares representing the profit above the exercise price of $115 on October 1, 2013. At Goldman’s current price of about $145, Berkshire would own about 2% of Goldman with a market value of $1.3 billion. This arrangement would be beneficial to both Goldman and Berkshire. The amount of dilution in Goldman shares would be substantially reduced from 10% to 2%. Berkshire would not only be retaining $5 billion in capital, but also committing only $1.3 billion to this investment (not $6.3 billion = $5 billion + $1.3 billion). Warren Buffett has promised that the exercise of the Goldman warrants would result in a long-term investment for Berkshire.