Warren Buffett's Berkshire Hathaway Inc. gave up an opportunity to become the biggest shareholder in Goldman Sachs Group Inc., choosing to take stock instead of cash profits he might have made on a transaction that started in 2008.
Instead of owning about 8.5 percent of Goldman, Berkshire will end up owning about 2 percent, a stake worth about $1.5 billion, according to a plan made public Tuesday. Several other large investment groups own more Goldman shares.
“We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago,” Buffett, 82, said in a statement.
Said Lloyd C. Blankfein, 58, Goldman's chairman and CEO: “We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs.”
Berkshire held warrants that allowed it to purchase 43.5 million Goldman Sachs shares for $115 apiece until Oct. 1. Under the new plan, Berkshire would buy about 10.5 million shares. The exact number of shares depends on prices in the days just before the purchase takes place.
The new deal eliminates some of the risk for Berkshire, which otherwise would have had to invest $5 billion in Goldman and, to cement a profit, sell the shares later. For Goldman Sachs, the fifth-biggest U.S. bank by assets, the plan keeps Berkshire as a shareholder while reducing the dilution for other shareholders.
“To buy the 43 million and sell them to reap the profit would have substantial transactional cost,” said Richard Cook, co-founder of Cook & Bynum Capital Management LLC in Birmingham, Ala., which oversees Berkshire shares. “Goldman has avoided the dilution.”
The new agreement also means Berkshire is depending on Goldman Sachs stock remaining above $115 in the final 10 trading days of September. The shares last traded below $115 in November. Goldman Sachs closed at $146.54 in New York. The bank is up about 15 percent so far this year and rose 41 percent in 2012.
Goldman Sachs turned to Buffett, a cult figure in the investing world, to shore up its capital and restore market confidence after the firm's stock tumbled and borrowing costs spiked following the Sept. 15, 2008, collapse of Lehman Brothers Holdings Inc.
News of Berkshire's 2008 investment also helped Goldman Sachs raise $5.75 billion from a stock offering in two days.
In the 2008 transaction, Berkshire invested $5 billion for preferred stock that paid Berkshire a 10 percent annual dividend and created the warrants. Goldman Sachs paid Berkshire a 10 percent premium when it redeemed the preferred shares in 2011.
If the warrant agreement announced Tuesday were struck based on the average stock price of the 10 trading days through Monday — $150.16 — Berkshire would receive $1.53 billion of stock, or about 10.5 million shares, based on Monday's closing price of $146.11.
Buffett is “putting up less capital than he otherwise would have,” Cook said in a phone interview. “He could have bought all 43 million shares. Buffett must feel like he has a better place to deploy the capital” than in Goldman Sachs.
Berkshire's cash hoard was about $47 billion at the end of December. Since then, he has committed about $12 billion toward a deal with Jorge Paulo Lemann's 3G Capital to take ketchup maker HJ Heinz Co. private.
Goldman Sachs's partners, the most senior employees at the firm, owned about 57.8 million shares, or about 11.6 percent of the stock, as of Feb. 1, according to a regulatory filing.
The warrant deal adds Goldman Sachs to Berkshire's common-stock investments in U.S. banks including Wells Fargo & Co. and US Bancorp. Berkshire also has a preferred stake and warrants in Bank of America Corp., the second-largest U.S. lender.