March 1, 2024

DealBook: The Perils of Chasing Buffett

An investment by Warren E. Buffett is often seen as a harbinger of good fortune for a company’s shareholders.

When Berkshire Hathaway made a $5 billion investment in Bank of America last month, the stock quickly jumped — a phenomenon known as the Buffett bounce.

But it does not always pay to follow Mr. Buffett’s moves, at least when he buys preferred shares rather than common stock.

Consider his General Electric deal. Mr. Buffett, who in 2008 swooped in with a $3 billion investment for the troubled conglomerate, will net a tidy profit when G.E. pays back the money next month.

Warren Buffett, chief of Berkshire Hathaway.Charles Dharapak/Associated PressWarren E. Buffett, chief of Berkshire Hathaway.

Along with his principal, Mr. Buffett will take home an extra $300 million, as well as any accrued and unpaid dividends. During the course of his investment, the preferred shares paid a 10 percent annual dividend, or roughly $300 million a year.

Investors in the common stock have not fared as well over the same period. At the time of Mr. Buffett’s investment, shares of G.E. were trading at about $24.50. Today, they are down nearly 40 percent, at about $15.40.

It is a similar story with Goldman Sachs, which took a $5 billion lifeline from Mr. Buffett during the depths of the financial crisis.

The investment bank returned the cash earlier this year. As in the G.E. deal, Mr. Buffett and Berkshire Hathaway banked an annual 10 percent dividend, plus some extras when Goldman paid back the money. In all, Mr. Buffett took home $1.7 billion on the investment, or about $190,000 a day.

Goldman investors have not been as fortunate. When Mr. Buffett stepped onto the scene, the stock was selling for about $125 a share; it is now at about $104.

Of course, Mr. Buffett has an interest in seeing the stocks of Goldman Sachs and G.E. do well.

In both cases, he has warrants to purchase common shares of the companies at specific prices, which can be exercised through 2013. At current levels, those warrants are essentially worthless.

While it remains to be seen how Mr. Buffett will ultimately fare on his investment in Bank of America, the deal has all the hallmarks of those for Goldman and G.E. There is a 6 percent annual payout and a premium at redemption of $250 million.

And once again, Berkshire will share in any upside in the stock. Over the next 10 years, the company has the right to purchase 700 million shares at a strike price just north of $7.14. (The shares are currently at $7.)

But those stock gains would mainly be gravy.

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