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.

(hidden for your protection)
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108 Responses to “How Much Did Warren Buffett Pay For BofA Anyway?”

  1. VonSloneker says:

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

  2. PMCO_sucks says:

    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. Guesto says:

    Jesus. Good stuff, Matt.

  4. Elchupanebre4 says:

    Nice work Matt.

  5. Guest VonGuest says:

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

  6. Fidoucheiary says:

    It's an American option, not a Euro.

  7. PermaGuestII says:

    Cool stuff- thx.

  8. Financial_Servicer says:

    This analysis caused a directionally suggestive movement in my pants.

  9. Put_Option says:

    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.

  10. Nice work, Matt. Very interesting stuff.

  11. UBS Senior Analyst says:

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

  12. G.E. and G.S. says:

    Wow BAC got the crap end, what idiots!

  13. Alpha_Bets says:

    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

  14. Stamford_Sucks says:

    Hi Matt, I'd like to discuss an opening on our global team. Details in the link below:

    UBS Investment Bank

  15. CWood says:

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

  16. Guest says:

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

  17. im_new_here says:

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

  18. D Gartman says:

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

  19. Nailz6 says:

    -1 for not creating more tabs.

  20. Nerd says:

    Is the spreadsheet link not working only for me?

    -Guy who wants to compare spreadsheets

  21. LatAm Guy says:

    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

  22. HFT says:

    Wow! GS does hire smart guys.

  23. max says:

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

  24. 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

  25. Guestor the Magnificent says:

    TZH;DR tag FTW

  26. Guestasaurus says:

    TZH;DR tag FTW

  27. Ba3 says:

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

  28. Guest says:

    Nice work, interested in a VP position with GS?

    -GS MD

    wait a minute…

  29. Stupid Daikini says:

    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?

  30. Knowmorethanyoudo says:

    what is TZH;DR?

    UBS relocatee

  31. andyprigge says:

    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.

  32. Swiss_Guy_69_x says:

    Driving equities via taking a bath is the NKI

  33. O.O says:


  34. Big Swinging Dick says:

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

  35. UBS backoffice- bsd says:

    thanks matt

  36. Guest says:

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

  37. Yeah_yeah says:

    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.

  38. 2StopShop says:


  39. +1 says:

    analysis paralysis

  40. guest says:

    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?

  41. Shades says:

    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.


  42. Guest says:

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

  43. Some Jerk says:

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

  44. Guest says:

    according to… the model is pretty spot on at 8.5% discount rate, and at ~38.5% volatility.

  45. Girl says:

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

  46. guy says:

    How do you get the 8.25%-8.5%?

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  80. Hindsight Is EZ says:


    How about a 'mark to market' exercise?

    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.