March 26, 2013 / 1:35 PM / 5 years ago

UPDATE 4-Buffett trades warrants for smaller stake in Goldman

* Buffett to get shares instead of cash
    * Deal avoids dilution risk for Goldman
    * Goldman, Berkshire shares rise

    By Ben Berkowitz and Lauren Tara LaCapra
    March 26 (Reuters) - Warren Buffett has given up his chance
to become Goldman Sachs Group Inc's largest shareholder
by converting his warrants into a smaller stake in the bank at
no additional cost to his Berkshire Hathaway Inc.
    Buffett received the warrants as part of a 2008 deal during
the depths of the financial crisis, when his investment in
Goldman was seen as a vote of confidence in the firm. Under that
deal, Berkshire had the right to buy about 43.5 million Goldman
shares - or a roughly 9 percent stake - at an exercise price of
$115 per share, for $5 billion in total. 
    On Tuesday, Goldman announced a new deal that would give
Berkshire a much smaller stake, but would not require it to
commit any capital to exercise the warrants: Berkshire would
convert the warrants for Goldman shares equal in value to the
difference between the warrants' exercise price and the average
closing price for the 10 trading days up to Oct. 1.
    At current market prices, Buffett would receive 9.2 million
shares, or a 2 percent stake, making him the ninth largest
investor in Goldman, according to Thomson Reuters data. 
    "He's basically taking the profit that he would get without
having to lay out the cash," said Gregory Warren, an analyst at
Morningstar who covers Berkshire Hathaway. "He just takes the
shares and sticks them in his portfolio."
    For Goldman, the deal was an opportunity to prevent the
dilution that would have occurred had Buffett fully exercised
the warrants. 
    The deal is "all good for Goldman," said Glenn Schorr, an
analyst at Nomura who covers the bank. "And who wouldn't want
(Warren Buffett) as a larger, long term shareholder?"    
    Goldman shares rose 0.16 percent to $146.34 in late
afternoon trading. Berkshire's widely held Class B stock rose
1.3 percent to $103.68, not far off all-time highs.
    "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.
    Buffett's investment in Goldman in 2008 cost the bank
dearly. In addition to the warrants, the bank had to give
Berkshire preferred stock that paid 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, analysts said Buffett will potentially have made a profit
of more than $3 billion on his original $5 billion investment.
    Bill Smead, chief investment officer of Smead Capital
Management in Seattle, said it was a good time for Buffett to
take a small stake in Goldman because the investment banking
business was on the cusp of an upswing in activity.
    "We might be at the beginning of where investment banking
and mergers-and-acquisitions and arbitrage and all those things
that normally go on that Goldman Sachs makes money on - that
have hardly existed over the last five years - exists again,"
said Smead, whose firm holds shares in Berkshire and until
recently also had a position in Goldman. 
    "He might have been biding his time," said Smead of Buffett.
    Buffett has invested 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 $7.14 a share
over a 10-year period. The shares closed Monday at $12.40.
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