Derivatives are confusing, even pretty simple ones, which is why Goldman Sachs can describe Warren Buffett’s sale of $5 billion of GS stock like this:
The Goldman Sachs Group, Inc. today announced that it has amended its warrant agreement with Berkshire Hathaway Inc., and certain of its subsidiaries (collectively, Berkshire Hathaway) from cash settlement1 to net share settlement.
“We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” said Warren Buffett, Chairman and Chief Executive Officer of Berkshire Hathaway. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer of Goldman Sachs.
In September 2008, Buffett bought – among other things – warrants to buy 43.5mm shares of Goldman Sachs stock in October 2013 for $115 a share, for a total purchase price of $5 billion. Today he amended that to instead allow him to buy in October 2013, for a total purchase price of zero, a number of Goldman Sachs shares equal to (A) 43.5 million times (B) [the average trading price of those shares at the end of September 2013 minus $115] divided by (C) that average trading price. As of when I type this, at a price of $145.80, that works out to around 9.2 million shares. So one way to read today’s agreement is that in effect Buffett is selling back 34 million (give or take) shares to Goldman for $5 billion. Read more »
The new hotness appears to be large cash-rich companies directly providing subordinated financing for big LBOs. Microsoft bound itself to Dell via sub debt in its LBO, and now Warren Buffett’s Berkshire Hathaway is doing a very odd LBO of H.J. Heinz with Brazilian private equity firm 3G Capital. Heinz’s announcement of the merger is brief and dull, but Buffett has filed his commitment letter and disclosed that he will “invest $12.12 billion to acquire a package of equity securities consisting of preferred and common stock and warrants issued by Holding. The preferred stock will have a liquidation preference of $8 billion, will pay or accrue a 9% dividend, and will be redeemable at the request of Holding or Berkshire in certain circumstances.” So he’s providing $4bn of common equity and $8bn of preferred leverage. The remaining $11-ish billion of the $23-ish billion purchase price will come from 3G (equity) and from a JPM/WFC-led debt financing.
There’s a basic tactical explanation for the structure, which is that it solves for this equation:
- Berkshire is an unlevered1 equity investor,
- 3G is an LBO shop,
- it’s 3G’s deal – they sourced it, they’ll operate it, they did the press conference – so 3G needs to own more than 50% of the equity,2
- but they’re not gonna put up, like, $12 billion in equity.
The Guarantee Fairy
Warren Buffett Vouches For America’s Banks, Stops Just Short Of Pledging To Let Carl Quintanilla Shave His Head On CNBC If Proved WrongBy Bess Levin
Warren Buffett, the billionaire investor who oversees stakes in some of the largest U.S. banks, said the nation’s lenders have rebuilt capital to the point where they no longer pose a threat to the economy. “The banks will not get this country in trouble, I guarantee it,” Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway, said in a phone interview last week. “The capital ratios are huge, the excesses on the asset side have been largely cleared out.” [...] Buffett’s firm has investments in at least four of the seven biggest U.S. lenders by assets, including a stake of more than $14 billion in San Francisco-based Wells Fargo, $5 billion in Bank of America and warrants that allow it to buy $5 billion of Goldman Sachs Group Inc. shares. Berkshire also has a holding in U.S. Bancorp. “Our banking system is in the best shape in recent memory,” Buffett said. [Bloomberg]
On March 30, 2011, Warren Buffett penned an open letter expressing support for his former lieutenant, David Sokol, whose trading activities had been called into question. “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful,” Buffett wrote. Then, a month later, he told shareholders and reporters gathered at the BKR annual meeting in Omaha that, actually, Sokol was a degenerate bum; a piece of garbage that needed to be taken out, lest it stink up the place. (Actual words: “inexcusable,” “inexplicable,” in violation of “the company’s insider-trading rules and code of ethics.” Buffett added that Berkshire “had turned over some very damning evidence” re: Sokol to the Securities and Exchange Commission, to boot.)
Though Sokol did not publicly respond to the comments at the time, they presumably stung quite a bit, since having your unassailable ex-boss basically call you a lowlife does not do wonders for the reputation. Now, a year later, after being informed that the SEC would not be taking action against him, is he in a Zen place about life in general and Buffett’s words specifically? Are the two men cool? Could Sokol see them being friends again one day? At the very least, is he ready to laugh about them? Yes, yes he is. Read more »
SEC: It’s Not Like Warren Buffett’s Right-Hand Man, Who Was In Charge Of Finding Companies To Acquire, Had Any Unusual Insight Into What Companies Warren Buffett Might AcquireBy Matt Levine
The SEC probably came to the right decision in not taking any action against David Sokol but he’s still a delightful insider trading puzzle. Sokol, you’ll recall, is a former Berkshire Hathaway executive and Warren Buffett heir presumptive who was fired because he bought $10mm of Lubrizol stock, then pitched the company to Buffett without telling him that he (Sokol) had just bought a bunch of the stock,1 and then made $3mm when Buffett ended up buying all of Lubrizol at a premium. Here are, to a first not-legal-advice approximation, some things that are probably true:
- If Buffett had (1) decided to buy Lubrizol and (2) bought $10mm of Lubrizol stock for Berkshire’s trading account,2 and then (3) Berkshire approached Lubrizol and negotiated a deal: not insider trading!
- If Sokol had (1) convinced Buffett to buy Lubrizol and (2) bought $10mm of Lubrizol stock for his personal account, and then (3) Berkshire approached Lubrizol and negotiated a deal: insider trading!
The difference is not the insideriness – Buffett/Berkshire are more insidery, or have more material nonpublic information, than Sokol – but rather the misappropriation of that material nonpublic information. If Berkshire trades on Berkshire’s plans, that’s sort of an epistemological necessity. If Sokol trades on Berkshire’s plans, when he has some duty not to – if, for instance, Berkshire has policies requiring him to keep its plans confidential – then that’s insider trading.
But instead, it appears that the order of operations was (1) Sokol bought the stock, (2) Sokol convinced Buffett to buy Lubrizol, and (3) Berkshire approached Lubrizol and negotiated a deal. Sokol wasn’t trading on Berkshire’s plans: he was trading on his plans to convince Berkshire to buy Lubrizol (and, probably, to convince Lubrizol to be bought).3
I’ve always been fond of Warren Buffett’s schtick of being an adorable Cherry-Coke-drinking grandfather whose fuzzy sweaters hide some sharp elbows, talking up old-timey value investing while making his money on distressed sweetheart deals, and railing against derivatives while doing lots of shady ones. So I’m pleased that today he basically announced “we bought back a bunch of shares from one deceased buddy of mine, against our previously announced guidelines for how we’d buy stock, which we just amended to make this deal happen.” That seems shady!
Felix Salmon covers the shadiness here but also says this:
Buybacks are considered a good thing, on the stock market, for three reasons. Firstly, they reduce the number of shares outstanding, which means that the value of the remaining shares goes up: the company is worth the same amount, so the value per share is higher. Secondly, they provide an extra bid in the market, which helps support and drive up the share price. And thirdly, they give shareholders the opportunity to sell their shares back to the company: if they want to sell where the company is buying, they have that option.
So I submit to you that there’s a fourth reason buybacks could be considered a good thing: some stocks are a good investment, and if yours is a good investment, maybe you should buy it, instead of, like, “hoarding cash” or doing dumb M&A deals or whatever.
This sounds like a nice theory but is almost always wrong; typically, if company is all “the best investment we can find is our stock and it will only go up from here,” their stock is about to crater. But Warren Buffett isn’t a typical corporate CEO, stock-picking-abilities-wise. He’s … y’know, he’s a guy whose whole thing is being good at picking stocks, plus the Coke/grandpa stuff. And so his theory about buybacks is not primarily about EPS accretion or providing a bid in the market: it’s about buying stock at below “intrinsic value,” whatever that is.
Also he’s a guy who’s good at getting good deals. So why’d he get a bad deal here? Read more »
“…let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.” [NYT]
Do you want to invest like Warren Buffett? Sure you do. You know who will tell you how? Strangely, some guys at AQR:*
[W]e create a portfolio that tracks Buffett’s market exposure and active stock-selection themes, leveraged to the same active risk as Berkshire. We find that this systematic Buffett-style portfolio performs comparably to Berkshire Hathaway.
They acknowledge that Robo-Buffett doesn’t incur transaction costs that flesh-Buffett does (because R.-B. is as of yet just a simulation) but, that aside, “comparably” is an understatement:
Whee! Go Robo-Buffett! Who, intriguingly, looks a lot like … AQR: Read more »