Warren Buffett will become one of Goldman Sachs' ten largest shareholders essentially for free, after he and the bank amended a 2008 deal to exchange his potential profit on Goldman warrants for stock.
The exchange, which Goldman detailed on Tuesday, saves Buffett billions of dollars in upfront costs and lets Goldman minimize dilution to its stock. Under a 2008 deal, Buffett had held the right to acquire about 43.5 million shares of stock at an exercise price of $115 (U.S.).
Goldman said it will now give Berkshire shares reflecting the difference between the warrants' original exercise price of $115 and the average closing price of Goldman's stock for the 10 trading days up to October 1.
At that price, the structure of the deal implies that Berkshire would receive 9.6 million Goldman shares. That would make Buffett the ninth-largest investor in the firm, according to Thomson Reuters data.
"We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs," Goldman Sachs Chief Executive Lloyd Blankfein said in a statement.
Buffett, in the same statement, affirmed that Berkshire intended to retain a "significant investment" in Goldman.
The new shares represent about 2 per cent of Goldman's outstanding stock as of mid-February. Had Buffett fully exercised the warrants, it would have represented about 9 per cent of Goldman's stock.
The deal is "all good for Goldman," said Glenn Schorr, an analyst at Nomura who covers the bank.
Buffett's implied stake was already included in Goldman's fully diluted sharecount, said Schorr, who added: "And who wouldn't want (Warren Buffett) as a larger, long term shareholder?"
Berkshire received the warrants in 2008 after investing in Goldman during the depths of the financial crisis, in what was seen, at the time, as a vote of confidence in the bank.
It came at a cost, though – preferred stock that paid Buffett dividends of $15 a second. Goldman repurchased those shares from Buffett at a premium in March 2011.
Between that premium, the dividends the preferreds paid while he held them, a special dividend at the time of redemption, and the paper profit on the shares from the warrant deal, Buffett will potentially have made a profit of nearly $4.7-billion on his original $5-billion investment.
Berkshire's widely held Class B stock rose 0.7 per cent to $103.13 in morning trading, not far off all-time highs the shares hit earlier this year.
Buffett has made similar – and similarly lucrative – confidence-boosting investments in other financial services firms in recent years.
In August 2011, Berkshire Hathaway invested $5-billion in Bank of America Corp. when the No. 2 U.S. bank's shares were sinking amid concerns about its capital. In that deal, Berkshire received preferred shares as well as warrants to purchase 700 million Bank of America shares at a price of $7.14 over a 10-year period. The shares closed Monday at $12.40.