Buffett’s Deal with General Electric

Yesterday in the Wall Street Journal’s “MarketBeat”, there was an article entitled “Warren Buffett’s Goldman Sachs Bet Worth $2 Billion on Paper”. The article praises Buffett’s deal with Goldman Sachs in which Berkshire Hathaway invested $5 billion by saying, “Looks like Warren has done it again”. The investment currently has an unrealized gain of about $2 billion. Reporter Lavonne Kuykendall says that “the jury is still out on a similar deal with General Electric” and that the “investment hasn’t performed well, yet.” I disagree. The GE deal was struck on substantially similar terms as the Goldman Sachs deal and in my opinion is performing very well for the shareholders of Berkshire Hathaway. I made the following comment at WSJ.com in response to the article.

“Saying the “jury is still out” on Buffett’s deal with General Electric seems to miss what a great deal Buffett put together. He is being paid $300 million per year on his $3 billion investment. He has no downside exposure to the stock and still has at least two more years to wait for the warrants to be in the money. If GE calls the preferred shares after three years, he will get his money back plus another $300 million. The warrants would certainly have significant value now if they traded. It would probably be impossible to put together a deal like that today. Buffett was able to do it because he could make a swift decision and had the capital to back it up. Moreover, his reputation, which functions as a type of competitive advantage, put him in a position to do the deal.”

The article judged the merits of Buffett’s deal with GE based on the current quotational loss of GE’s stock price with reference to the strike price of Berkshire Hathaway’s GE warrants, rather than focusing on the facts of the deal and its longterm economic value.

The take away is that a stock is not valued based on its quotation in the market, but rather on the underlying value of the business. As Buffett stated, “Price is what you pay, value is what you get.”

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2 thoughts on “Buffett’s Deal with General Electric

  1. Gregory Speicher

    I did not see a per share price reported on Berkshire Hathaway's preferred GE stock. It is convertable into common at a price of $22.25 per share.

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