• 25 Aug 2011 at 12:07 PM

How Much Did Warren Buffett Pay For BofA Anyway?

There are those who will tell you that the equity value of a big bank is an imponderable mystery. Which is true. And there are those who will tell you that Bank of America’s sale of preferred shares plus warrants to Buffett will “keep BofA from a more-dilutive capital raise.” Which is probably true as a matter of, like, EPS and share issuance and stuff. And there are those who point out that Buffett did not get a 2008-level deal with a double-digit coupon and otherwise face-ripping terms. Which is also true.

Still, he’s Warren Buffett. He got a deal. And imponderable mysteries (and meaningless EPS numbers) aside, you could if you wanted to calculate the value per common share that Buffett’s investment implies for BAC. This is neither rocket science nor particularly scientific at all and I suggest it only because, in my former life, I often encountered people who thought it was a sensible thing to look at and ponder in their hearts.

So here is a Google Docs spreadsheet that does it. Short answer is about $5.28, which is just a bit less than the $7.14 strike price on Buffett’s warrants, or the high-$7s area where it’s currently trading.

The thinking here is as follows, based on the publicly announced terms of the deal:

1. You can value the preferred pretty easily. This is not entirely true! But pretend it is. The simple way to do this is to value the preferred as a perpetuity with a 6% coupon discounted at the going yield (as of yesterday) for BAC’s traded perpetual preferreds, which were at around 8.25%8.50% in round numbers. You could get worried about differing call dates etc. and do something more complicated, like pretend it’s a term instrument and will be called at 105% in X years – which made sense for some of the TARP-era 10% prefs – but the perpetuity model is easier and probably makes good sense here. The spreadsheet gives you the option but, y’know, avoid it.

2. Once you’ve done that you subtract the preferred value from Buffett’s $5bn investment to get the value of his warrants. You divide that number by 700 million – the number of warrants – to get the value per warrant.

3. You can plug that in to a Black-Scholes calculator where you know things like the strike price (around $7.14), maturity (10 years), etc. The implied volatility on a 10-year BAC option is somewhat mysterious but you might think about things like the fact that long-term S&P vol has been in the low 20s, financials are more volatile than the market broadly, and BAC’s short-dated vol has been in the high 30s for the last six months and is like six zillion today. And then throw in a 35% vol for the hell of it. Or don’t – bold blue inputs here are changeable to your heart’s content.

4. So the thing you’re trying to figure out is the implied stock price. You could use yesterday’s close as the spot price – $6.99, in which case Buffett got about $5.9 billion of stuff for a $5 billion investment, which probably makes sense as a matter of what kind of deal he can negotiate (Column G does the math). Or you could use the current price as spot – call it $7.82 – and then he’s at more like $6.3 billion (Column H). So he made like $450mm of “theoretical” value today.

But you want to solve for the implied spot, meaning the BAC stock price at which Buffett paid $5bn to get $5bn of paper. And that’s the goalseek in C30-C32 (and Column I). And on our assumptions that’s an implied price of around $5.28.

Is that airtight? No. Does it “prove” that BAC is “worth” five bucks and change? No. Is it directionally suggestive of the kind of discount Buffett bought BAC at? Probably.

108 comments (hidden to protect delicate sensibilities)
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Comments (108)

  1. Posted by VonSloneker | August 25, 2011 at 12:18 PM

    There's 20 minutes of my life I just got back :) Thanks Matt

  2. Posted by PMCO_sucks | August 25, 2011 at 12:21 PM

    1. Hire Matt L.
    2. Blah blah blah.. zero hedge link…black scholes… google docs… EPS… implied spot…..blah, blah, blah
    3. PROFIT!

    -May 2011 dealbreaker conference

  3. Posted by Guesto | August 25, 2011 at 12:21 PM

    Jesus. Good stuff, Matt.

  4. Posted by Elchupanebre4 | August 25, 2011 at 12:23 PM

    Nice work Matt.

  5. Posted by Guest VonGuest | August 25, 2011 at 12:25 PM

    I do not come to this weblog to read analysis like this.

  6. Posted by guest | August 25, 2011 at 12:26 PM

    Cool story, brah.

  7. Posted by Fidoucheiary | August 25, 2011 at 12:26 PM

    It's an American option, not a Euro.

  8. Posted by PermaGuestII | August 25, 2011 at 12:28 PM

    Cool stuff- thx.

  9. Posted by Financial_Servicer | August 25, 2011 at 12:29 PM

    This analysis caused a directionally suggestive movement in my pants.

  10. Posted by Put_Option | August 25, 2011 at 12:29 PM

    From mark-to-market aka financial alchemy, Buf will see a profit by the close.

    Besides he pulled a Soros. The mere fact the man is 'in' BofA is moving the stock. Every joker broker with a 7/63 probably put a portion of his or her mother's $100k portfolio towards BofA today just because Buf is in it. Seriously, stop by Brother Jimmy's or Stumble Inn in the UES or go to Public House in Midtown tonight to overhear all these retail clowns talk about how they totally 'killed it' today by longing BofA.

  11. Posted by geoffgeoffgeoff | August 25, 2011 at 12:30 PM

    Nice work, Matt. Very interesting stuff.

  12. Posted by UBS Senior Analyst | August 25, 2011 at 12:33 PM

    Wait why aren't we discounting the preferreds at BAC's WACC?

  13. Posted by G.E. and G.S. | August 25, 2011 at 12:37 PM

    Wow BAC got the crap end, what idiots!

  14. Posted by minus 1 | August 25, 2011 at 12:38 PM

    rotflmao

  15. Posted by Alpha_Bets | August 25, 2011 at 12:41 PM

    This 'Black-Scholes calculator' you speak of is not approved by the CFA Institute. Please recalculate using the Texas Instruments BA II Plus (including the BA II Plus Professional), or the Hewlett Packard 12C (including the HP 12C Platinum).

    -UBS CFA Institute Calculator Policy Analyst

  16. Posted by Stamford_Sucks | August 25, 2011 at 12:44 PM

    Hi Matt, I'd like to discuss an opening on our global team. Details in the link below:
    https://jobs.ubs.com/1033/ASP/TG/cim_jobdetail.as

    Best,
    UBS Investment Bank

  17. Posted by CWood | August 25, 2011 at 12:44 PM

    Does this mean if the stock remains the same for 10 years Buffett will profit by $862mm?

  18. Posted by Guest | August 25, 2011 at 12:45 PM

    Taking an 80-percent pay cut to do the same work is the NKI!

  19. Posted by im_new_here | August 25, 2011 at 12:46 PM

    Great post but doesn't 35 vol 10 years out sound pretty high?

  20. Posted by D Gartman | August 25, 2011 at 12:52 PM

    Exceptionally good work, but you all should be aware that I knew Matt was capable of it.

  21. Posted by Nailz6 | August 25, 2011 at 12:54 PM

    -1 for not creating more tabs.

  22. Posted by whowhawhen | August 25, 2011 at 1:06 PM

    loved it

  23. Posted by Nerd | August 25, 2011 at 1:17 PM

    Is the spreadsheet link not working only for me?

    -Guy who wants to compare spreadsheets

  24. Posted by PermaGuestII | August 25, 2011 at 1:18 PM

    He gets to a) get in 9-ish; b) leave at 5-ish; c) share an office with Bess. Think that's worth the pay cut to leave 200 West…

  25. Posted by LatAm Guy | August 25, 2011 at 1:21 PM

    Wow, how long has it been since the last time I was at DB, did it got acquiered by CNBC?

    – Summer Analyst that has been quite a while under a rock

  26. Posted by HFT | August 25, 2011 at 1:21 PM

    Wow! GS does hire smart guys.

  27. Posted by guest | August 25, 2011 at 1:23 PM

    Last I checked CNBC didn't have two brain cells to rub together let alone the skills required to do basic math but nice try.

  28. Posted by max | August 25, 2011 at 1:23 PM

    43 people on the google docs spreadsheet right now. Hope all those input cells are locked.

  29. Posted by CurrencyTrader | August 25, 2011 at 1:24 PM

    What is a horse shoe? What does a horse shoe do? Are there any horse socks? Is anybody listening to me?

    -Matt and the Old lady in Billy Madison

  30. Posted by Guestor the Magnificent | August 25, 2011 at 1:38 PM

    TZH;DR tag FTW

  31. Posted by Guestasaurus | August 25, 2011 at 1:41 PM

    TZH;DR tag FTW

  32. Posted by Ba3 | August 25, 2011 at 1:55 PM

    It is not a European call option, it's a warrant and should be valued as such.

  33. Posted by Guest | August 25, 2011 at 2:02 PM

    Nice work, interested in a VP position with GS?

    -GS MD

    wait a minute…

  34. Posted by Rahodeb | August 25, 2011 at 2:08 PM

    Yes, golf glap indeed.

  35. Posted by Stupid Daikini | August 25, 2011 at 2:17 PM

    Does Warren's warrant strike decrease w/ div payments like publicly traded As and Bs? Are his preferred's cumulative? Where am I going with this?

  36. Posted by Knowmorethanyoudo | August 25, 2011 at 2:34 PM

    what is TZH;DR?

    UBS relocatee

  37. Posted by At Your Service | August 25, 2011 at 2:38 PM

    Too Zero Hedge; Didn't Read

  38. Posted by NowOnePerson | August 25, 2011 at 2:47 PM

    Feigning interest in a career as a financial blogger to slyly show off one's ability to build overly-complicated financial models in an attempt to discretely market oneself to WB is the NKI.

  39. Posted by andyprigge | August 25, 2011 at 3:09 PM

    Ok so buffet pays 5billion he's worth 50billion, so if he looses everything in this buy he will only have 45billion left! If he has so much confidence let him put up the other 45billion! The end times are near indeed.

  40. Posted by PermaGuestII | August 25, 2011 at 3:10 PM

    If CNBC had acquired DB, every single post today would have been about Steve Jobs/AAPL or Hurricane Irene.

  41. Posted by guest | August 25, 2011 at 3:35 PM

    5.28 sounds like a good level to be buying… let those jokers buy up here

  42. Posted by Swiss_Guy_69_x | August 25, 2011 at 3:49 PM

    Driving equities via taking a bath is the NKI

  43. Posted by VonSloneker | August 25, 2011 at 3:49 PM

    Glances back at the last 10…

    Nope

    :)

  44. Posted by Chuck | August 25, 2011 at 3:53 PM

    did they buy 'outs'?

  45. Posted by Pathological Liar | August 25, 2011 at 3:56 PM

    Well stated.

  46. Posted by O.O | August 25, 2011 at 3:58 PM

    Applause.

  47. Posted by Billy Zane | August 25, 2011 at 4:02 PM

    Stop making up financial instruments

  48. Posted by Big Swinging Dick | August 25, 2011 at 4:03 PM

    So BAC is worth 5 bucks?
    /sells a yard at market
    -Reading impaired Big Swinging Dick-

  49. Posted by BBBuffet | August 25, 2011 at 4:06 PM

    "giving my money to charity as I retire" = increasing net worth by a B or so over 5 years

  50. Posted by UBS backoffice- bsd | August 25, 2011 at 4:13 PM

    thanks matt

  51. Posted by Guest | August 25, 2011 at 4:26 PM

    Come at me bro!
    -UBS Rate Quant/Part-time Honda Sales

  52. Posted by Guesticles | August 25, 2011 at 4:45 PM

    This is CNBC we are talking about. They would have stated that Hurricane Irene made Steve Jobs leave.

  53. Posted by Yeah_yeah | August 25, 2011 at 4:51 PM

    You can't back out a implied stock price based off some arbitrary volatility. Your price would be just as arbitrary.

    Here's what you can do. You can calculate the real yield on BAC preferred. According to Bloomberg, that was 9.29% yesterday. Buffett got only 6% today, so that 3.29% haircut is for the warrants. Over 10 years that haircut is worth about $1.5 billion. According to the Bloomberg warrant calculator, those warrants are worth $2.3 Billion to $3.3 Billion depending on the vol. Bloomberg vol is 70% and historical vol is 45%. These high vols will mean revert over ten years, so the real value of those warrants should be less than $2 – $2.3 Billion. So Buffett got a $500 million or 10% sweetener for this deal. That's cheap for a Buffett seal of approval, so he must really expect the stock to go up.

  54. Posted by 2StopShop | August 25, 2011 at 4:55 PM

    *sigh*

  55. Posted by 2StopShop | August 25, 2011 at 4:55 PM

    Intense.

  56. Posted by +1 | August 25, 2011 at 5:02 PM

    analysis paralysis

  57. Posted by guest | August 25, 2011 at 5:02 PM

    The warrants alone are worth $3.5 billion.

    Why do people continue to insist that a Buffett investment implies that all is right with a company, when he is getting distressed investment returns?

  58. Posted by Shades | August 25, 2011 at 5:09 PM

    Wow. Now WB can hire the finest and smartest talent in the world, but does he do this granular analysis? I suspect he has someone doing this stuff, but at the end he goes with his gut – which is amazingly good. This type of analysis is the stuff of CFAs – there's a lot of 'em out there. WB seems to recognize franchise value – Salomon Bros, Coca-Cola etc. Brilliant man. I'll bet he never got a CFA. But he believes in fundamental analysis.

    Shades

  59. Posted by Guest | August 25, 2011 at 5:12 PM

    "Viewing in simple list mode due to high traffic to this document." FTW

  60. Posted by DES Genius LOOKING | August 25, 2011 at 5:17 PM

    Yes, if you're a buyer. Hell no if you're a seller.

  61. Posted by Charlie | August 25, 2011 at 5:21 PM

    Ajit probably did all the figuring for him since some RISK was involved.

  62. Posted by Jimmy | August 25, 2011 at 5:46 PM

    Overly complicated???

  63. Posted by Some Jerk | August 25, 2011 at 5:47 PM

    Mark my words, if Buffet invested, it means he spoke with Obama, and El Presidente pledged to backstop BofA’s losses.

  64. Posted by Bugs Bunny | August 25, 2011 at 5:47 PM

    Intriguing idea but what would we do with overly-complicated financial models?

  65. Posted by Juan | August 25, 2011 at 7:36 PM

    This is explanation, Yeah _yeah's, is far more accurate a calculation of WB's BAC deal value and theoretical values than Matt's. No cut against Matt's analysis- it was a valiant attempt by a "banker" not a solid options/converts/derivs trader, and unfortunately for Matt and much of the banker, wannabe banker tools out her in DB land- it REALLY showed. It's also a perfect example of why GS resorts to ripping off it clients for p&l instead of trading for it. But I digress.

    John Bender's ghost.

  66. Posted by Models Milf | August 25, 2011 at 7:50 PM

    This is correct. Also, interesting just to do a back-of-the-envelope thought experiment: How much would you pay for a 10yr at the money call option today? I'm thinking 3-4 bucks sounds about right. Quite frankly, pretending that there is any exactitude in any model run by man or machine is BS given the vagaries of the inputs (i.e. vol) and demonstrative of why I-banks are in the shitter and Buffets still racking it up.

  67. Posted by Guest | August 25, 2011 at 8:28 PM

    Joke Briefer?

  68. Posted by Guest | August 26, 2011 at 12:04 AM

    according to http://www.bloomberg.com/news/2011-08-25/buffett-… the model is pretty spot on at 8.5% discount rate, and at ~38.5% volatility.

  69. Posted by Guest | August 26, 2011 at 12:34 AM

    Another reason Buffett does these type of deals is because he wants zero market impact.
    He just went long 700,000,000 shares without incurring any of the 10 to 20% market impact of a Buffett BofA investment in the open market.

  70. Posted by Girl | August 26, 2011 at 4:38 AM

    Matt-sweetheart, whant to mary you – what you think?)

  71. Posted by guy | August 26, 2011 at 1:02 PM

    How do you get the 8.25%-8.5%?

  72. Posted by Guest | August 26, 2011 at 4:16 PM

    you can check the yield from wsj, or whatever financial sites. take the dividend paid (assumed quarterly) * 4 divide it by the closing price. note the 8.25 – 8.5 was based on closing from 2 days ago.

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  107. Posted by Hindsight Is EZ | April 5, 2013 at 7:13 PM

    Interesting.

    How about a 'mark to market' exercise?

    BAC-WTA
    Expiration: January 16, 2019
    Strike: $13.30

    These things are worth materially less than Buffetts warrants.

    They have only dipped below $3 a couple of times in their history.

    Or maybe a Level II approach.

    Just saying.

  108. Posted by Doramin | September 18, 2013 at 11:27 AM

    Methinks somebody really loves to toss around the jargon. But he does seem to be actually saying something. The gist of it is: Don't break your piggy bank and invest the butter-and-egg money in BofA.

    I'm inflamed. Where do me and my buds go to set up our protest camp?