(Photo : Creative Commons/Erik Derr)
Warren Buffett's Berkshire Hathaway Inc. set to become one of the biggest shareholders in Goldman Sachs Group Inc. without any exchange of funds, Bloomberg is reporting.
The deal is part of a plan the companies have accepted to settle warrants granted back in 2008, during the height of the financial crisis.
Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under the new arrangement between the two companies, Buffett's firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million.
The deal is linked to the Sachs Group's decision to ask Berkshire Hathaway Inc. Chairman Warren Buffett to help shore up its capital and restore market confidence after the Sachs stock tumbled and the cost of borrowing skyrocketed in the wake of the 2008 collapse of Lehman Brothers Holdings Inc.
The new deal actually reduces some risk for Berkshire, which would have had to spend about $5 billion to exercise the warrants and then sell the shares -- about 9 percent of the bank's outstanding stock -- to make a profit.
"To buy the 43 million and sell them to reap the profit would have substantial transactional cost," Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Alabama, which oversees Berkshire shares, told Bloomberg.
For Goldman Sachs, the fifth-biggest bank in the U.S. on assets, the plan solidifies Berkshire's participation as a shareholder and reduces the dilution for other investors.
"We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs," Lloyd C. Blankfein, 58, the New York-based bank's chairman and chief executive officer, said in the statement.
Buffett, 82, considered an investment guru by many, invested $5 billion for preferred stock with a 10 percent dividend in 2008 and received the five-year warrants. Goldman Sachs paid Omaha, Nebraska-based Berkshire a 10 percent premium when it redeemed the preferred shares in 2011.