Legendary investor Warren Buffett yesterday disclosed plans to invest $5 billion in Goldman Sachs, which recently agreed to change its structure along with Morgan Stanley to a bank-holding company from an investment bank.
Buffett's Berkshire Hathaway will buy $5 billion worth of perpetual preferred stock from Goldman Sachs in a private offering, which will pay a 10-per cent dividend or $500 million a year. Goldman will however be able to buy back the stock any time, but at a 10 per cent premium.
In addition to this, Berkshire will also receive warrants to purchase further $5 billion worth of common stock within five years at a strike price of $115 per share.
Separately, Goldman plans to raise at least $2.5 billion in a common stock offering under pressure from regulators and shareholders in order to make its proposed bank more stable.
The deal was announced after markets closed and amounts to a massive vote of confidence by Buffett in the 139 year old institution, which had not required external funding, but went ahead only to restore investor confidence that had been shattered by Wall Stret titans.
"Goldman Sachs is an exceptional institution," Buffett said in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."
''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," said Lloyd C Blankfein, chairman and CEO of The Goldman Sachs Group. "We view it as a strong validation of our client franchise and future prospects,'' ''This investment will further bolster our strong capitalization and liquidity position.''
This is Buffett's first venture into investing in banks since his loss in 1987 when he paid $700 million for a 12-per cent stake in Salomon Brothers, which was found to be involved in a trading scandal.
Berkshire Hathaway currently has total assets of nearly $278 billion, including a stake in Wells Fargo, American Express, Coca Cola and The Washington Post.
Buffet recently increased his stakes in the energy sector through his 'MidAmerican Energy' company, which is a global provider of energy services based in Des Moines, Iowa.
Last week, MidAmerican Energy made a tentative agreement to acquire Constellation Energy Group, a fortune 125 company for $4.7 billion (See: Warren Buffett's MidAmerican Energy acquires Constellation Energy for $4.7 billion )
Warren Buffet also acquired Tungaloy Corp from Nomura subsidiary for $1 billion on Monday (See: Waren Buffet to acquire Tungaloy Corp from Nomura subsidiary)
On Monday, Japan's largest bank, Mitsubishi UFJ Financial Group agreed to pay $8.4 billion to acquire 20 per cent in the troubled US securities firm Morgan Stanley, which along with Goldman Sachs agreed to change its structure from an investment bank to a bank-holding company, in order to stay afloat. (See: Goldman Sachs, Morgan Stanley surrender investment bank status)