Warren Buffett, riding to the rescue at Goldman Sachs (GS) with a $5 billion cash infusion announced Sept. 23, has long used the services of the giant investment bank, though sometimes grudgingly so. When the Oracle of Omaha cut a deal with the Pritzker family last year to buy a $7 billion-a-year crazy-quilt of businesses called Marmon Holdings, Buffett proudly said that he and the wealthy Chicago family arrived at a price without the help of advisers, a style that let them avoid "nit-picking."
Buffett agreed to shell out an initial $4.5 billion for a 60% stake in Marmon that is expected to grow over time. But Berkshire Hathaway (BRKA), Buffett's investment company, did have to use Goldman to do some of the heavy lifting to finalize the deal. And the outfit did such a good job of it that in his annual letter to shareholders last year Buffett singled out a banker there, Byron Trott, as "the rare investment banker who puts himself in his client's shoes." Buffett added that he and his partner at Berkshire, Charlie Munger, "trust him completely."
It's not clear whether Trott, who is still associated with Goldman, had anything to do with the deal Buffett just struck to take a big chunk of Goldman. But there's no doubt that Buffett thinks highly of the outfit and that the partners there return the favor. Lloyd Blankfein, Goldman Sachs' chief executive, was effusive in announcing the deal: "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."
Private Preferred Offering
Through Berkshire, Buffett is taking $5 billion worth of perpetual preferred stock in Goldman in a private offering. For that, he'll get a 10% dividend and warrants to buy $5 billion of common stock with a strike price of $115 a share. He'll be able to exercise the warrants at any time over five years. Goldman's stock closed Sept. 23 at 125.05, up 3.5%, and it was climbing past 133 a share in after-hours trading after news of the deal broke. The firm's stock last fall was worth about 248 a share, but has plunged with the fortunes of Wall Street generally. Like the wily Nebraskan, the market seems to believe Goldman's pummeling has been overdone.
Goldman and the other big free-standing investment bank left on Wall Street, Morgan Stanley (MS), on Sept. 21 agreed to convert themselves (BusinessWeek.com, 9/22/08) to commercial banks to avoid the fate that befell three other giants on the Street. Bear Stearns collapsed earlier this year and was sold to JPMorgan Chase (JPM) in a fire sale, while Lehman Brothers filed for bankruptcy protection, and Merrill Lynch (MER) rushed into a sale to Bank of America (BAC).