Legendary investor Warren Buffett is set to become one Goldman Sachs Group Inc.'s (NYSE: GS) largest investors without shelling out one penny.
Impressive as that is, what's even more striking is how the guru investor brokered the Goldman deal to his distinct advantage.
The savvy CEO of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) amended terms of warrants--a type of security that gives the holder the right to purchase securities from an issuer at a certain price within a certain time frame-issued to Berkshire during the 2008 financial meltdown.
At the time, Buffett's investment in Goldman was gutsy. It was viewed as a vote of confidence in the bank as the country faced economic crisis.
The warrants originally gave Berkshire the right to buy $5 billion worth of Goldman common shares at $115 each any time before Oct. 1. Thanks to the new $1.5 billion deal inked Tuesday, Buffett's company will receive 9.2 million shares.
According to data from Bloomberg News, that makes Berkshire the ninth-largest shareholder in Goldman.
The Oracle of Omaha said in a press release, "We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago. I have been privileged to have known and admired Goldman's executive leadership team since my first meeting with Sidney Weinberg in 1940."
Berkshire's windfall from the investment surpasses $3 billion, making it one of Buffett's most profitable wagers in recent history.
Goldman also benefits. The investment bank avoids a flood of sell-side shares that would have been dilutive. It also gets to include the revered name of Warren Buffett to its shareholder roster.
"We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs," Goldman's CEO Lloyd Blankfein said in a statement.
Buffett's Real Motive in Goldman Deal
It could be that Buffett's real motive wasn't to hold a huge stake in Goldman, but to save money.
Berkshire would have had to spend about $5 billion to exercise the warrants and sell the shares to get a profit.
Under the new deal, Berkshire is "risking less money," David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland, explained to The Wall Street Journal.
"I don't know if that's an indication of having less confidence, but he's making a decision to put less capital at risk," Kass said.
Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, AL, which oversees Berkshire, shares a similar sentiment.
Cook told Bloomberg, "Buffett must feel like he has a better place to deploy capital" than in Goldman stock.
Indeed, Goldman is in better shape that it was during the financial crisis when Buffett made the original investment. But the Fed's recent stress tests found problems in Goldman's capital planning process. The central bank found issues with Goldman's application to return billions of dollars to investors through share buybacks and dividends.
Goldman plans to make some changes and resubmit its plan by the end of Q3.
What About Bank of America?
The Goldman deal has many questioning if a similar scenario could emerge from the warrants Berkshire obtained in its 2011 deal with Bank of America Corp. (NYSE: BAC).
Berkshire stands to amass 700 million shares of BofA if it exercises all its warrants. That would amount to a 6% stake in the Charlotte, NC based-bank. Bank of America is likely mulling the same potential dilution that reportedly moved Goldman to modify its Buffett arrangement.
BofA and Berkshire have plenty of time to figure how to best handle such a situation. The warrants don't expire until 2021. A lot can happen before then.
Yet, Berkshire's fresh and sizable addition to its carefully curated portfolio paves the way for a considerable BofA stake.
The addition would compliment Buffett's other big bank holdings. Wells Fargo & Co. (NYSE: WFC), it largest position at 439,857,861 shares, represents 19.96% of Berkshire's stock holdings. US Bancorp (NYSE: USB) at 61,264,601 shares, equals 2.60% of holdings.
For more stocks Warren Buffett has bet big on, check out: 5 Picks Buffett and Insiders Love Right Now
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