NEW YORK (Reuters) - Warren Buffett’s Berkshire Hathaway Inc (BRKa.N) (BRKb.N) will invest $5 billion in Goldman Sachs Group Inc (GS.N), in a major boost for the Wall Street bank from perhaps the world’s best-known investor.
“It’s a vote of confidence which is gold plated,” said Michael Holland, a money manager at Holland & Co in New York. “You don’t get better than this.”
Shares of Goldman rose 6.5 percent following the announcement, while Standard & Poor’s 500 futures gained 16 points.
Berkshire will buy $5 billion of perpetual preferred stock that carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 percent stake in Goldman.
Goldman also plans to sell at least $2.5 billion of common stock in a public offering. The company averaged 448.3 million common shares outstanding in the quarter ended Aug 29.
Shares of Goldman had fallen 50 percent from their record set last Oct 31, as credit markets tightened and investors worried about the viability of U.S. investment banks.
On Sunday, Goldman said it would become a bank holding company, enabling it to accept deposits and killing the investment bank model that dominated Wall Street for decades.
Buffett, for his part, has built his reputation on investing in companies he considers undervalued.
“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.”
Buffett was not available for immediate comment, according to Debbie Bosanek, who works in his Omaha, Nebraska office.
“Clearly they are saying that Goldman is not only going to be a survivor, but that it is going to prosper in this new world of financial companies,” said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
Lloyd Blankfein, Goldman’s chief executive, in a statement called Buffett’s investment “a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position.”
The investment is Buffett’s second major purchase in less than a week. On Thursday, Berkshire’s MidAmerican Energy Holdings Co affiliate agreed to buy power supplier Constellation Energy Group Inc CEG.N for $4.7 billion. Constellation took that bid over a higher offer led by French energy giant Electricite de France SA (EDF.PA).
Goldman’s abandoning of the investment banking model has raised speculation it might merge with a commercial lender.
Berkshire as of June 30 disclosed stakes in six major U.S. banking and financial services companies: American Express Co (AXP.N), Bank of America Corp (BAC.N), M&T Bank Corp (MTB.N), SunTrust Banks Inc (STI.N), U.S. Bancorp (USB.N) and Wells Fargo & Co (WFC.N). The latter was Berkshire’s largest equity investment other than Coca-Cola Co (KO.N).
U.S. Bancorp spokesman Steve Dale and Wells Fargo spokeswoman Julia Tunis Bernard declined to comment. Bank of America last week announced plans to buy another Wall Street investment bank, Merrill Lynch & Co Inc MER.N. The other companies did not immediately return calls seeking comment.
Perhaps Buffett’s most famous foray into Wall Street came in 1991, when he became interim chairman at Salomon Inc, a major Berkshire investment, to help it clean house following a Treasury market scandal. It was not one of Buffett’s better investments.
“I don’t know if it’s a statement on all the financials or the market,” said Marshall Sonenshine, chairman of Sonenshine Partners in New York, referring to the Goldman investment. “He sees Goldman Sachs as a good value where it’s currently priced. Remember, he invested in Salomon Brothers in the past, and that wasn’t a sign that Salomon was going to start doing well.”
Buffett may have reason to believe otherwise, said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York.
“The valuation is great, and with what the government’s doing to unfreeze debt markets, it’s a great time to be buying,” he said.
Shares of Goldman rose $8.07 to $133.12 in after-hours trading following the announcement, after closing up $4.27, or 3.5 percent, to $125.05 in regular trading.
Additional reporting by Megan Davies, Joseph A. Giannone and Dan Wilchins in New York, Jim Finkle in Boston and Jessica Hall in Philadelphia; editing by Carol Bishopric