Warren Buffett plowed $3 billion into General Electric at the height of the financial crisis.
The investor received $3 billion in preferred stock paying a 10% dividend, plus stock warrants.
Berkshire Hathaway made about a $1.5 billion profit. Buffett later said he could have made more.
Warren Buffett piled $3 billion into General Electric in October 2008, handing vital cash to the industrial titan just as credit markets seized up and global demand slumped. Here’s a look back at the storied investment.
Weathering the storm
GE CEO Jeff Immelt had issued a profit warning in late September, citing “unprecedented weakness and volatility in the financial services markets.” The credit crunch was especially bad news for GE Capital, the group’s massive financing division that loaned money to consumers and businesses.
Immelt cut the dividend that GE Capital paid to headquarters, halted share buybacks, and put further borrowing plans on hold. He also moved up his goal to reduce GE’s reliance on financing profits to the end of 2009.
GE’s stock price had plunged by roughly a third since the start of 2008. However, its market capitalization was still more than $245 billion, making it the country’s second-most valuable public company after Exxon.
Faced with the monumental challenge of reshaping GE and riding out a brutal downturn, Immelt and his team decided they could use a “rainy-day fund” or a “backup to a backup,” The Wall Street Journal reported at the time.
The pair shook hands on Berkshire investing $3 billion in GE in exchange for preferred stock paying a 10% annual dividend. GE would be allowed to redeem the shares at a 10% premium after three years.
The investor also secured warrants enabling Berkshire to purchase 135 million of GE’s common shares for $22.25 each — close to its stock price at the time — at any point in the next five years.
“Insurance is expensive, especially when you buy it from Warren Buffett”
GE accepted Buffett’s terms because the famed investor provided more than money; his backing was also a vote of confidence in its future.
“GE is the symbol of American business to the world,” Buffett said in the press release announcing the deal. “I am confident that GE will continue to be successful in the years to come.”
Immelt added that Buffett’s cash, plus at least $12 billion from a public stock offering, would boost GE’s flexibility, help it execute its plans faster, and allow it to “play offense in this market should conditions allow.”
GE’s shareholders recognized Buffett’s money was a useful cushion for the company.
“It’s an insurance policy in case things get worse,” fund manager Wayne Titche told The Journal at the time. “In today’s market, better safe than sorry.”
However, they still balked at the high interest rate and bemoaned the dilution of existing investors’ shares.
“Insurance is expensive, especially when you buy it from Warren Buffett,” shareholder Arthur Rice told the newspaper.
Buffett trumpeted the GE deal, as well as similar bets on Goldman Sachs and Wrigley, in his 2008 letter to shareholders.
“We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory,” he said.
In all three cases, Berkshire acquired “substantial equity participation as a bonus,” he added.
Buffett raked in $1.5 billion — and could have made more
Berkshire received $3.3 billion when GE redeemed its preferred stock in October 2011, as well as $900 million in dividends in the intervening three years.
The pair also amended Berkshire’s warrants in 2013 to allow the conglomerate to exercise them without spending any cash. It received 10.7 million shares as a result, which it eventually sold them for about $315 million in 2017.
Between the $300 million premium, the dividends, and the proceeds from the share sales, Berkshire raked in about $1.5 billion in profit or a 50% return.
Moreover, Buffett revealed at Berkshire’s annual meeting in 2018 — almost a decade after the deal — that he could have driven a harder bargain, but cut GE some slack given the extraordinary circumstances.
“They were going to take the terms we offered,” he said, according to a transcript on Sentieo, a financial-research site.
“But we actually didn’t push it to the limit because there really wasn’t anybody else around.”
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