berkshire hathaway

DealBook: Berkshire Unit Bids $3.25 Billion for Transatlantic

August 8, 2011 by NewsMaker Leave a Comment

4:44 p.m. | Updated with statements from Validus and Allied

A division of Warren E. Buffett’s Berkshire Hathaway waded into the fight for Transatlantic Holdings, bidding $3.25 billion in an attempt to top competing offers from two other insurers.

Berkshire’s National Indemnity is offering $52 a share, Transatlantic confirmed in a statement on Sunday. That is a nearly 15 percent premium to Transatlantic’s Friday closing price.

“With your stock trading at $45.83, I have to believe that you will find our offer to buy all of Transatlantic shares outstanding at $52.00 per share to be an attractive offer,” Ajit Jain, the head of Berkshire’s sprawling reinsurance operations, wrote in a letter to Transatlantic’s chief executive, Robert Orlich, on Friday.

Berkshire’s bid is also well above the current values of the two outstanding offers for Transatlantic. The stock-and-cash bid by Validus Holdings was worth about $2.9 billion as of Friday’s close. The bid was worth nearly $3.5 billion when it was first announced.

An all-stock merger with Allied World Assurance, which Transatlantic had already agreed to, was worth about $2.76 billion. It was originally worth about $3.2 billion.

The brief letter from Mr. Jain gave few details about Berkshire’s proposal, other than a $75 million breakup fee payable to National Indemnity if the two strike an agreement but do not close a deal before Dec. 31. Mr. Jain added that he expected to hear a response by the close of business on Monday.

Berkshire did not specify what form its offer would take. But in keeping with the insurance conglomerate’s proclivities, it would likely be an all-cash offer.

Even at $3.2 billion, Berkshire’s offer is well below Transatlantic’s book value of $4.2 billion. And if it is all-cash, it would offer Transatlantic shareholders no upside if the combined company improves financially.

Transatlantic said in its statement that its board will “carefully consider and evaluate the proposal” from Berkshire. But it is unclear whether, with two offers already on the table, the Transatlantic board can reach a decision on the latest offer by Berkshire’s deadline.

Should Transatlantic agree to a deal with Berkshire, it would be liable for a $115 million breakup fee payable to Allied.

Validus has already taken its bid directly to Transatlantic’s shareholders, hoping to persuade them with both a higher price and the promise that it will create a well-balanced company with a big presence in reinsurance.

That prompted strong opposition from Transatlantic, which rejected the bid and filed a lawsuit against Validus, arguing that the unwanted bidder made misleading statements about its offer to shareholders.

Validus’s chief executive, Edward J. Noonan, has promised to wage a lengthy fight for Transatlantic.

Meanwhile, Allied — which made the first bid for Transatlantic — is arguing that its merger proposal would create a diversified operation, including a specialty insurance business.

So far, shareholders of both Validus and Allied appear unimpressed with either company’s campaign for Transatlantic. Shares in Allied have tumbled more than 13 percent since the insurer unveiled its merger proposal in June, while those in Validus have fallen 11 percent since making its hostile bid last month.

In a statement on Sunday, Validus again urged Transatlantic to hold merger talks without what it called restrictive conditions, including a limit on stock ownership.

Allied said in a statement that it remained committed to its merger with Transatlantic and derided the Berkshire offer as “opportunistic.”

Berkshire’s bid follows the company’s rosy earnings report on Friday, in which it disclosed $3.42 billion in profit for the second quarter this year, topping analyst predictions. Earlier this week, Allied announced that it earned $93.8 million in its second quarter, beating analyst estimates. Two weeks ago, Validus reported $109.9 million in net income for the quarter, matching analyst expectations.

Transatlantic is being advised by Goldman Sachs, Moelis Company and the law firm Gibson, Dunn Crutcher.

Allied is being advised by Deutsche Bank and the law firms Willkie Farr Gallagher and Baker McKenzie. Validus is being advised by Greenhill Company, JPMorgan Chase and the law firm Skadden, Arps, Slate, Meagher Flom.

Article source: http://feeds.nytimes.com/click.phdo?i=ecb30f875f2c5709e738210a89418a91

Filed Under: Business News Tagged With: berkshire hathaway, chief-executive, combined company

DealBook: S.E.C. Delays Rajat Gupta’s Trial for Six Months

June 30, 2011 by NewsMaker Leave a Comment

Alessandro Della Bella/Keystone, via Associated PressRajat K. Gupta.

8:17 p.m. | Updated

The curious case of Rajat K. Gupta just got curiouser.

Mr. Gupta, the former Goldman Sachs director and onetime head of McKinsey Company, was scheduled to stand trial on July 18 on civil charges that he had leaked corporate secrets to Raj Rajaratnam, the billionaire hedge fund manager convicted of insider trading last month.

But the trial has been delayed for at least six months, according to two people familiar with the case who would discuss it only on the condition of anonymity.

The lengthy postponement in the case, brought by the Securities and Exchange Commission, raises questions about the fate of Mr. Gupta, the most prominent business executive ensnared by the government’s insider-trading crackdown.

The United States attorney’s office in Manhattan, which has been investigating Mr. Gupta’s role in the case for at least three years, named Mr. Gupta a co-conspirator of Mr. Rajaratnam’s but has not charged him criminally.

Just a week before Mr. Rajaratnam’s trial began, the S.E.C. brought an unusual civil administrative proceeding against Mr. Gupta, accusing him of tipping Mr. Rajaratnam about confidential results at Goldman and Procter Gamble, where he also served as a director. Among the tips was news that Berkshire Hathaway, run by Warren E. Buffett, had agreed to invest $5 billion in Goldman at the peak of the financial crisis, the S.E.C. said.

Gary P. Naftalis, a lawyer for Mr. Gupta, has called the S.E.C.’s case “totally baseless.”

Mr. Gupta played a starring role at Mr. Rajaratnam’s trial. Although he did not take the witness stand, the jury heard Mr. Gupta’s name throughout the testimony. They listened to a wiretap in which Mr. Gupta told Mr. Rajaratnam about secret Goldman board discussions. They also heard a recording of Mr. Rajaratnam telling a colleague that a Goldman director had leaked the bank’s earnings to him.

It is unclear why federal prosecutors have not charged Mr. Gupta, but the government appears to have a weaker criminal case against him than it did against some of Mr. Rajaratnam’s other co-conspirators.

Certain evidentiary rules could prohibit prosecutors from using two incriminating wiretaps on which Mr. Rajaratnam told colleagues about tips he had received about Goldman. Without those tapes, the government would be forced to rely on more circumstantial evidence at trial — like phone bills and trading records — to establish Mr. Gupta’s guilt.

In the S.E.C.’s civil proceeding, which is tried not before a jury but an S.E.C. administrative law judge in Washington, the agency has a lower burden of proof than federal prosecutors would have in a criminal case. The S.E.C. also would not be subject to the rules of evidence that in a criminal trial could make the case against Mr. Gupta more difficult.

Lawyers for Mr. Gupta have sued the S.E.C. to get his case moved to federal court, contending that the agency violated his right to jury trial by bringing the administrative proceeding. That lawsuit, which is before Judge Jed S. Rakoff in Federal District Court in Manhattan, is not the reason for the suspension of Mr. Gupta’s S.E.C. trial, according to people familiar with the case.

So what is the cause for the long delay? No one will say. Mr. Naftalis, Mr. Gupta’s lawyer, declined to comment, as did spokesmen for the S.E.C. and the United States attorney’s office.

Behind-the-scenes dickering between the Justice Department and the S.E.C. could be behind the postponement, legal experts say. The United States attorney’s office in Manhattan had tried unsuccessfully to get the S.E.C. to delay bringing its civil action against Mr. Gupta until the conclusion of Mr. Rajaratnam’s trial, according to court filings. Now, if federal prosecutors are still weighing charges against Mr. Gupta, they could again be asking the S.E.C. to hold off.

“The timing of civil and criminal proceedings is never preordained, but typically a matter of negotiations between the S.E.C. and federal prosecutors,” said Eli J. Richardson, a white-collar defense lawyer at Bass, Berry Sims and a former prosecutor. “The substantial delay in Gupta’s trial without public explanation suggests that’s what’s likely going on here.”

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Filed Under: Business News Tagged With: berkshire hathaway, business executive, mr rajaratnam

DealBook: The $2.6 Million Buffett Power Lunch

June 13, 2011 by NewsMaker Leave a Comment

Lunch in New York just got a little more expensive.

An auction to dine in the city with Warren E. Buffett, the chairman of Berkshire Hathaway, raised a record $2,626,411 on Friday.

The winning bid was $2,345,678. But after the auction closed, the winner, whose name was not revealed, pledged an additional chunk of cash, topping last year’s record-setting amount by $100, according The San Francisco Chronicle.

The five-day auction, held on eBay, stalled after one bidder trumped a rival by a mere $100 last Monday. Bidders did not pick up their virtual paddles again until the auction chugged toward its close.

Proceeds from the auction will benefit Glide, a charitable foundation in San Francisco that provides assistance to the poor and homeless. The foundation was supported by Mr. Buffett’s late wife, Susan T. Buffett, who died in 2004.

The winner and seven friends will have the opportunity to break bread and chew the fat with Mr. Buffett at Smith Wollensky, a prominent New York steakhouse. The top bidder last year, who chose to remain anonymous, paid $2,626,311 million to dine with the Oracle of Omaha.

Previous winners of the auction, now in its 12th year, include David Einhorn, the hedge fund manager seeking to seal a deal for a minority stake in the New York Mets.

“The Glide lunch has become one of the highlights of the year for me,” Mr. Buffett wrote in an e-mail on Friday. “I meet some terrific new friends and we raise more money for a wonderful cause than I would have thought possible just a few years ago. I also get to enjoy a delicious steak at Smith Wollensky.”

But how much gratuity does one leave on a $2.6 million power lunch?

“The service by Branko and Mike is terrific,” Mr. Buffett said, referring to two waiters at the restaurant, “but I don’t leave a 20 percent tip.”

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Filed Under: Business News Tagged With: berkshire hathaway, oracle of omaha, smith wollensky

DealBook: Buffett Lets the Facts Bury Sokol

May 3, 2011 by NewsMaker Leave a Comment

OMAHA — In Warren E. Buffett’s view, he was as ruthless as ever.

The chairman of Berkshire Hathaway — who has faced scrutiny for weeks after revelations that a top lieutenant, David L. Sokol, bought $10 million of shares of Lubrizol while orchestrating an acquisition of the company — has been criticized for his initial response to the situation. In a press release, Mr. Buffett provided a detailed account of the questionable trades and declared that he did not believe the purchases “were in any way unlawful.”

But the public was vocal. Admittedly, I’ve been among those scratching my head about his reaction. After all, this is a guy whose mantra is, “Lose money for the firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

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Responding to the criticism, Mr. Buffett said, “What I think bothers some people is that there wasn’t some big sense of outrage.” He added, “I plead guilty to that.”

Over the weekend at Berkshire Hathaway’s annual shareholder meeting, where I was one of the three journalists posing questions to Mr. Buffett and his partner Charlie Munger, I think I have finally come to understand Mr. Buffett’s thinking.

While Mr. Buffett praised Mr. Sokol in the statement announcing the resignation, he left out one big “ruthless” fact that would change the narrative completely. The day he issued the release, Berkshire called the Securities and Exchange Commission and briefed them on Mr. Sokol’s trades, which Mr. Buffett described to me as “pretty damning evidence.”

“Calling the head of the enforcement division of the S.E.C. and laying out a pattern of trading that you know is going to result in something — Dave probably thought it was pretty harsh,” Mr. Buffett told me.

The S.E.C. is now investigating the matter, people briefed on the inquiry said. In a statement after the Berkshire meeting, a lawyer for Mr. Sokol issued a statement, saying the stock trades did not violate the law or Berkshire policy.

A close friend of Mr. Buffett’s explained his thinking this way. “Warren knew that the second that press release hit the wires, Sokol’s professional career was over. Done. Forever. Sokol was finished. He didn’t need to brag about being ‘ruthless.’ ”

“The media wanted more — a nasty quote about how upset Warren was with Dave. But what’s the point? Just laying out the facts so publicly was the most ruthless thing he could have done. If you worked at Berkshire, you got the message loud and clear.”

Mr. Buffett, who was clearly overcome with emotion at the time he drafted the original press release and is said not to have slept well for several days that week, said he praised Mr. Sokol out a sense of fairness.

“I felt that if I’m laying out a whole bunch of facts that are going to create lots of problems for him for years to come, that I also list his side of the equation in terms of what he’d done for Berkshire,” Mr. Buffett said.

That’s not to say Mr. Buffett or Mr. Munger believed they handled the situation perfectly.

“I think we can concede that that press release was not the cleverest press release in the history of the world,” Mr. Munger said. “The facts were complicated, and we didn’t foresee appropriately the natural reaction.”

“But I would argue that you don’t want to make important decisions in anger,” he continued. “You want to display as much ruthlessness as your duty requires, and you do not want to add one single iota because you’re angry.”

“You can always tell a man to go to hell tomorrow.”

Upon reflection, however, there may be virtue in Berkshire’s measured approach.

Despite all the blaring headlines and questions about whether Mr. Buffett’s reputation has been forever tarnished, Berkshire’s shareholders, the ones who actually have money on the line, seemed to be fine with the way the matter was handled.

At the shareholders’ meeting, I could not find any who were overly worked up about the matter or were raising larger questions about Berkshire’s compliance programs. Mario Gabelli, a big investor with shares of Berkshire, called the Sokol episode “irrelevant” and derided it as “a good story for the media.”

Nor did they seem worried about succession. Mr. Buffett made a passing remark that actually may have been the most telling of the entire weekend. After a query about whether Mr. Sokol had been his heir apparent, Mr. Buffett replied that the question “made an assumption there about Sokol being the next in line, which I’m not sure was warranted.”

From an investment perspective, Mr. Gabelli said the Sokol matter would not impact his thinking on the company, succession or anything else. He, like Mr. Buffett, simply cares about the company’s cold, hard numbers.

As for Berkshire’s compliance programs, which are not nearly as tough as those at most investment firms, Mr. Buffett clearly believes that he must run his company based on a modicum of trust.

“We can have all the records in the world and if somebody wants to trade outside them or something, you know, they’re not going to tell us they’re trading in their cousin’s name,” Mr. Buffett said. Mr. Munger added. “I think your best compliance cultures are the ones which have this attitude of trust and some of the ones with the biggest compliance departments, like Wall Street, have the most scandals.”

By the end of the weekend I still got the sense that Mr. Buffett, while furious with Mr. Sokol, struggled to publicly criticize him.

When asked why he thought Mr. Sokol did it, he repeatedly said it was “inexplicable.”

Mr. Munger, who often acts as the unfiltered version of Mr. Buffett, put it more bluntly, with a simple, one-word reply: “hubris.”

Andrew Ross Sorkin is the editor of DealBook.

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Filed Under: Business News Tagged With: berkshire hathaway, charlie munger, top lieutenant

DealBook: Buffett Eager to Move On After Sokol Affair

May 2, 2011 by NewsMaker Leave a Comment

Daniel Acker/Bloomberg NewsWarren E. Buffett, second from right, sits with his children, from left, Howard, Susie and Peter at the Berkshire Hathaway shareholder meeting in Omaha, Neb.

OMAHA — At the annual gathering of Berkshire Hathaway’s investors here this weekend,
Warren E. Buffett made it clear that, as far as he is concerned, it’s back to business as usual. But a former top manager for him,
David L. Sokol, may make that a difficult goal to accomplish.

Mr. Buffett said at a news conference on Sunday that while he viewed the controversy caused by Mr. Sokol’s abrupt departure a month ago as sad, he saw little reason to dwell on the matter for very long.

“I’ve got no strong feelings about it, except that it’s a very sad situation,” he said.

He said he planned no major changes to Berkshire’s management practices, which largely leave the executives of the company’s subsidiaries to operate as they please. With more than 260,000 employees working for him around the world, something can and will inevitably go wrong, Mr. Buffett said.

His longtime investing partner, Berkshire’s vice chairman, Charles Munger, addressed the issue more bluntly. “We’ve had a close brush with scandal two times in 50 years,” he said Sunday. “We’re not going to devote a lot of time to this.”

Nevertheless, Mr. Sokol appears ready to keep the issue alive and wage a fight against Berkshire and his onetime boss. In a statement issued after Berkshire’s annual meeting, Mr. Sokol’s lawyer insisted that Mr. Buffett was “transparently scapegoating” his client, and that Mr. Sokol had not violated company policy with those trades.

Mr. Buffett already used the annual meeting on Saturday, attended by tens of thousands of ardent investors from around the world, to speak at length about what he knew of Mr. Sokol’s stock purchases in a chemical maker that he later recommended to Mr. Buffett as a potential acquisition.

Berkshire announced in March that it would buy the chemical producer, Lubrizol, for $9 billion. The deal produced a $3 million paper profit for Mr. Sokol.

Mr. Buffett said Saturday that Mr. Sokol’s actions were “inexplicable and inexcusable,” though he declined to personally attack him. Mr. Buffett said that Mr. Sokol had violated company trading policy. In his statement, Mr. Sokol’s lawyer defiantly denied that claim, saying, “At no time did Mr. Sokol violate the law or any Berkshire policy.”

Mr. Buffett sought to parry those assertions on Sunday, arguing that he has been forthright in disclosing the relevant details of the matter. He said that he did not know of any other details relevant to an investigation, and that he was cooperating with regulators in their inquiries.

“The facts are the facts,” he said. “His lawyer wasn’t there. I know what happened.”

Since Berkshire disclosed Mr. Sokol’s resignation and its circumstances, the controversy has threatened to mar Mr. Buffett’s lustrous reputation among investors. But Mr. Buffett said he did not expect the affair to cause permanent damage.

The pressure on Mr. Sokol is likely to grow. The Securities and Exchange Commission is looking into his trades, according to people briefed on the matter, using in part information submitted by Berkshire. Mr. Buffett said on Saturday that the data his company had turned over was “pretty damning.”

Mr. Buffett spoke at greater length Sunday about more traditional topics of discussion for Berkshire meetings.

Asked by reporters from various countries — including Germany, Brazil and South Korea — about whether he would be interested in acquiring companies in those areas, he responded yes to all of them.

Asked again about a potential successor to him, Mr. Buffett said only that even the worst of the unnamed candidates would be “very, very good.”

Shareholders appeared to side largely with Mr. Buffett. At Berkshire’s meeting on Saturday, most seemed more concerned with potential investments and successors than with the Sokol matter.

“I trust Buffett and the board,” Mary Murphy, from Omaha, said on Sunday. “He seemed like he was being honest and saying what he knew.”

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Filed Under: Business News Tagged With: abrupt departure, berkshire hathaway, news conference

DealBook: Buffett Eager to Move On After Sokol Controversy

May 2, 2011 by NewsMaker Leave a Comment

Daniel Acker/Bloomberg NewsWarren Buffett, second from right, sits with his children, from left, Howard, Susie and Peter at the Berkshire Hathaway shareholder meeting in Omaha, Neb.

“I’ve got no strong feelings about it, except that it’s a very sad situation,” he said.

Berkshire announced in March that it would buy the chemical producer, Lubrizol, for $9 billion. The deal produced a $3 million paper profit for Mr. Sokol.

“The facts are the facts,” he said. “His lawyer wasn’t there. I know what happened.”

Mr. Buffett spoke at greater length Sunday about more traditional topics of discussion for Berkshire meetings.

Asked again about a potential successor to him, Mr. Buffett said only that even the worst of the unnamed candidates would be “very, very good.”

Shareholders appeared to side largely with Mr. Buffett. At Berkshire’s meeting on Saturday, most seemed more concerned with potential investments and successors than with the Sokol matter.

“I trust Buffett and the board,” Mary Murphy, from Omaha, said on Sunday. “He seemed like he was being honest and saying what he knew.”

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Filed Under: Business News Tagged With: berkshire hathaway, charles munger, scapegoating

DealBook: Exelon to Buy Constellation Energy for $7.9 Billion

April 28, 2011 by NewsMaker Leave a Comment

Exelon announced on Thursday that it would buy Constellation Energy in a $7.9 billion deal, the latest in a wave of consolidation among energy companies, particularly utilities.

Under the terms of the stock-for-stock transaction, Constellation investors would receive the equivalent of $38.59 a share, about 18 percent more than the 30-day average closing price of the stock. The combined entity would have a market value of roughly $34 billion.

“The combination of these two companies will drive innovation and value for customers by combining Exelon’s abundant clean energy supply and Constellation’s leading customer-facing sales and marketing platform,” Constellation’s chief executive, Mayo A. Shattuck III, said, in a statement. “This enterprise will have the scale and financial strength to drive expansion in competitive energy markets as well as new investment in the next wave of clean generation and sustainable products and services.”

The utility space has been an active one for mergers and acquisitions, as companies have sought to cut costs and increase scale. On April 20, the energy producer AES said it would buy DPL, the parent company of Dayton Power Light, for $3.5 billion in cash. In January, Duke Energy announced it would acquire Progress Energy for $13.7 billion in stock.

Exelon and Constellation have mixed histories as deal-makers.

In 2009, Constellation, based in Baltimore, agreed to be sold to Berkshire Hathaway’s MidAmerican Energy Holdings for $4.7 billion. It eventually canceled the deal and instead sold some nuclear assets to Électricité de France for $4.5 billion.

In 2008, Exelon pursued a $7.5 billion hostile bid for NRG Energy. When it could not win over NRG’s shareholders, Excelon dropped the deal. DealBook earlier reported a potential deal between Exelon and Constellation.

Exelon anticipates the acquisition of Constellation will break even in 2012 and be accretive to earnings by 2013. After the deal closes, the combined entity, to be called Exelon, will be the No. 2 residential electricity and natural gas distribution company, covering 6.6 million customers in Maryland, Illinois and Pennsylvania. It will also be the largest competitive power generator, with more than 34 gigawatts of power generation and 226 terawatt-hours of expected output.

“This merger creates the number one competitive energy provider with one of the industry’s cleanest and lowest-cost power generation fleets and one of the largest commercial, industrial and residential customer bases in the United States,” Exelon’s chief executive, John W. Rowe, said in a statement.

The deal, pending regulatory and shareholder approval, is expected to close by early 2012.

For Exelon, Barclays Capital, J.P. Morgan Securities, Evercore Partners and Loop Capital Markets served as financial advisers and Skadden, Arps, Slate, Meagher Flom as legal counsel. Morgan Stanley, Goldman Sachs and Credit Suisse Securities were Constellation’s financial advisers, and Kirkland Ellis acted as legal counsel.

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Filed Under: Business News Tagged With: berkshire hathaway, competitive energy, energy markets

DealBook: Exelon Nears Takeover of Constellation Energy

April 28, 2011 by NewsMaker Leave a Comment

8:12 p.m. | Updated

The energy utility company Exelon is near a deal to buy the Constellation Energy Group for about $7.7 billion in stock, people briefed on the matter said Wednesday.

A deal between the two would be the latest in a recent wave of consolidation within the energy industry, especially among utility companies.

Under the terms of the proposed takeover, Exelon would issue 0.93 of a new share for each Constellation share. At Wednesday’s closing prices, that would be worth about $38.59 a share.

That is a roughly 17 percent premium to Tuesday’s closing price, the last day before rumors of a potential deal pushed Constellation’s stock higher.

The merger could be announced as soon as Thursday morning, the people briefed on the matter said, cautioning that talks had not yet concluded and might still collapse.

An Exelon spokesman, Paul Elsberg, said: “Exelon continually evaluates all opportunities to add value for our shareholders, including M. A. However, we don’t comment on rumors about specific M. A. activity.” A representative of Constellation was not immediately available for comment.

Shares of Constellation rose 4 percent, to $34.40, on Wednesday amid reports of a potential sale. Platts, an energy information company, first reported the possible deal. Exelon shares rose slightly on Wednesday, to $41.49, giving the company a market value of $27.5 billion.

Utilities have sought to combine with each other to gain more customers, in part to fight falling prices. One of the largest deals announced so far this year is the $13.7 billion all-stock merger of Duke Energy and Progress Energy.

Constellation, based in Baltimore, has tried to sell itself before. Two years ago, it agreed to sell itself to Berkshire Hathaway’s MidAmerican Energy Holdings for $4.7 billion — only to cancel that deal in favor of selling nuclear assets to Électricité de France for $4.5 billion.

Exelon has also stumbled in previous deal-making attempts as well. It pursued a $7.5 billion hostile bid for NRG Energy beginning in 2008, only to drop its offer after failing to win over the target’s shareholders.

This post has been revised to reflect the following correction:

Correction: April 27, 2011

An earlier version of this article incorrectly stated the premium in the reported takeover offer as 18 percent.

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Filed Under: Business News Tagged With: berkshire hathaway, energy information, energy utility

DealBook: Goldman’s Sluggish Growth Raises Concern on Wall Street

April 20, 2011 by NewsMaker Leave a Comment

Pankaj Nangia/Bloomberg News Goldman Sachs paid off a lifeline from Warren E. Buffett’s company, Berkshire Hathaway.

Goldman Sachs gave investors a peek at the new normal on Wall Street — and many are worried.

In some ways, Goldman’s latest results looked good.

On Tuesday, the bank reported first-quarter earnings of $1.56 a share, nearly double analysts’ expectations. Some divisions like investment banking and investment management showed improvement. And Goldman repaid the pricey lifeline from Warren E. Buffett’s holding company, Berkshire Hathaway, the bank’s last major shackle from the financial crisis.

But investors instead focused on Goldman’s sluggish growth, which offered a stark reminder of the difficulties for an investment bank in this postcrisis world.

In trading and the rest of institutional client services, once the hallmark of the firm’s operations, revenue dropped by 22 percent, to $6.7 billion. Over all, first-quarter earnings slumped 21 percent, to $2.74 billion from $3.5 billion, including the one-time hit from the Berkshire repayment. Revenue fell to $11.9 billion from $12.8 billion. And its return on equity, an important measure of profitability, is down sharply from just a few years ago.

“Everyone is saying this sector is dead money,” said Roger Freeman, an analyst with Barclays Capital. “I hear it over and over, and Goldman is part of that.”

Investors took notice. Shares of Goldman fell sharply on Tuesday, dropping by as much as 3 percent before settling at $151.86, down 1.3 percent. The stock is off almost 10 percent for the year.

At issue is how Goldman Sachs and the rest of Wall Street will reverse the profit situation, given the new mandate to temper leverage and hang on to more capital. The looming threat of new financial regulation only makes the outlook more uncertain. Investment banks, and their shareholders, do not have a clear sense how the rules will affect business at a time when economic growth is already slow.

Goldman, which emerged from the crisis stronger than most companies, is not saddled with many of the same problems as its rivals. Bank of America continues to struggle under the weight of bad loans and mounting legal liabilities. Morgan Stanley is paying for a 2008 investment from the Japanese bank Mitsubishi UFJ Financial Group, a deal that costs the company roughly $900 million a year.

The firm also struck a note of optimism about the quarter despite lackluster results. On a conference call with analysts, executives said that client activity had increased, even amid continued economic concerns.

“We are pleased with our first-quarter results,” Lloyd C. Blankfein, chief executive, said in a statement. “Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results. Looking ahead, we continue to see encouraging indications for economic activity globally.”

Even so, investors are nervous about Goldman’s prospects. Many big names have been actively reducing their exposure, including Wellington Management, based in Boston. It sold more than one million shares in Goldman in late 2010, according to regulatory filings. Wellington declined to comment.

One concern is Goldman’s deteriorating return on equity. In the first quarter, Goldman’s return on equity was 12.2 percent. It was 20.1 percent a year ago and 38 percent at the beginning of 2009.

“Most investors have just one question: ‘How is the return on equity going to go up?’ ” said Mr. Freeman of Barclays. “The answer isn’t clear, given the uncertain regulatory environment.”

The current return on equity is also well below Goldman’s stated goal of 20 percent — a level that tracks closely to the firm’s average since its initial public offering in 1999. But the company is unwilling to revise its objective downward until there are fewer “unknown variables” surrounding its operating model, according to a person close to the company who was not authorized to speak publicly on the matter.

Although analysts are confident that Goldman will eventually be able to raise returns over time, it will be a tough slog in the near term.

Return on equity is the amount of money that a company delivers on each share. So if the total investor base grows, Goldman must produce even higher earnings to keep returns the same. Currently, Goldman is sitting on $64 billion of shareholder equity, up from $46.6 billion at the end of 2008, meaning that it has to work harder to generate the same return on equity.

To help increase returns, the company could issue a series of one-time dividends or share repurchases to reduce its capital. But that would be a tricky move right now. Regulators have been loath to let companies like Goldman buy back significant amounts of stock because they want them to have ample capital in the event of another economic shock. Also, Goldman is reluctant to let go of capital until it knows what regulatory changes are coming.

Meanwhile, the firm does not have the same ways to increase profits. Before, Goldman could ratchet up its leverage, relying on borrowed money to help amplify gains. With pressure from regulators to damp risk, the company’s gross leverage ratio fell to 12.9 percent at the end of the quarter, from 27.9 percent at the beginning of 2008.

“Until now, they were operating with two hands tied behind their back,” said Mr. Freeman. “Now they have just one hand, and it is still isn’t easy.”

Article source: http://feeds.nytimes.com/click.phdo?i=d88789bfb8e945c5caabf2c13490baa0

Filed Under: Business News Tagged With: berkshire hathaway, shackle, stark reminder

Stocks & Bonds: Last Day of Strong Quarter, and Shares Close Mixed

April 1, 2011 by NewsMaker Leave a Comment

The index of 30 large companies gained 742 points in that stretch. Measured against other first quarters, that is the largest point gain since 1998 and the second best on record.

The price of oil rose to a 30-month high. Slightly disappointing reports on unemployment claims and factory orders also weighed on the market.

Stocks rose in the first quarter despite uprisings in the Arab world, a jump in oil prices and the earthquake, tsunami and nuclear crisis in Japan.

“This is a market that has been defined by resilience in the face of uncertainty,” said Andrew D. Goldberg, a market strategist at J. P. Morgan Funds.

On Thursday, the Dow Jones industrial average fell 30.88 points, or 0.25 percent, to 12,319.73. The Standard Poor’s 500-stock index fell 2.43 points, or 0.18 percent, to 1,325.83. The Nasdaq composite index rose 4.28 points, or 0.15 percent, to 2,781.07.

The S. P. 500 rose 5.4 percent during the first quarter and the Nasdaq gained 4.8 percent.

Shares of Berkshire Hathaway lost 2.1 percent after the company said that David Sokol, once a candidate to succeed Warren E. Buffett as the head of the conglomerate, resigned.

Stocks swung between small gains and losses on Thursday as the price of oil surged to settle at $106.72 a barrel. In Libya, troops loyal to Col. Muammar el-Qaddafi retook control of the crucial oil port of Ras Lanouf from rebel forces. The power shift threatens the quick restart of oil exports promised by a rebel victory.

Oil prices have risen $20 a barrel since the Libyan uprising began in February. Higher oil prices can pinch spending by forcing consumers to pay more for gasoline and could cut into economic growth.

Spot gold prices also rose $4.52 an ounce to $1,423.02.

There were also slightly disappointing reports on new unemployment claims and factory orders. The Labor Department said fewer people applied for unemployment benefits last week, signaling that companies may be slowing layoffs. The number of new claims declined 6,000, to 388,000. Analysts expected a larger decline.

The news comes a day before the Labor Department’s monthly employment report. The unemployment rate is expected to remain unchanged at 8.9 percent.

Banks in Ireland were also under pressure. The country’s central bank said Thursday that four of its banks needed another 24 billion euros in coming months to show that they will not collapse in the face of future crises. Ireland has already put 46 billion euros into the country’s banks since 2009. The four banks will need to draw on an emergency credit line from the European Union and the International Monetary Fund.

Still, stocks in Europe broadly rose. The FTSE 100 in London closed up 16.13 point to 5,948.30 while the CAC-40 in Paris rose 36.64 points, to 4,024.44.

Interest rates were a little higher on Thursday. The Treasury’s benchmark 10-year note fell 7/32, to 101 11/32, and the yield rose to 3.46 percent from 3.43 percent late Wednesday.

Article source: http://feeds.nytimes.com/click.phdo?i=c1d8ed8b9a66abcc45149273c6420253

Filed Under: Business News Tagged With: berkshire hathaway, nuclear crisis, unemployment claims

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