The Art of The Deal By Virtuoso Warren Buffett

Under the leadership of chair and CEO Warren Buffett, Berkshire Hathaway Inc. (BRK.A) has grown into a colossus with a market capitalization of $535 billion, part conglomerate with operating divisions in a wide variety of industries, and part investment company with equally diverse equity holdings. Yet another category of lucrative deals struck by Buffett involve finding companies temporarily strapped for cash and offering them an injection of capital.

These deals often involve issuing preferred stock with a high dividend yield to Berkshire, sometimes with warrants attached that allow future purchases of the borrower's common stock at a set price. The biggest such deals are summarized in the table below.

Berkshire as Banker: Biggest Deals

• 2019: Occidental Petroleum, $10 billion of preferred stock yielding 8%, plus warrants to purchase 80 million shares of OXY common stock
• 2013: H.J. Heinz, $8 billion of preferred stock yielding 9%
• 2008: Mars Inc., $2.1 billion of preferred stock yielding 5%, plus $4.4 billion of bonds yielding 11.45%
• 2011: Bank of America, $5 billion of preferred stock yielding 6%, plus warrants to purchase 700 million shares of BAC common stock
• 2008: Goldman Sachs, $5 billion of preferred stock yielding 10%, plus warrants to buy $5 billion of GS common stock
• 2008: General Electric, $3 billion of preferred stock yielding 10%, plus warrants to buy $3 billion of GE common stock

Sources: Berkshire Hathaway corporate filings

Details on the Deals

During the 2008 financial crisis and its aftermath, Berkshire acted as a lender of last resort, as the Journal puts it, for troubled industrial conglomerate GE and teetering financial institutions Goldman Sachs and Bank of America. Overall, despite the declining fortunes of GE, Berkshire earned a total profit of about $1.7 billion on that deal, per Benzinga.com.

With the Goldman deal, by 2011 Berkshire had earned $3.7 billion, including $1.27 billion of preferred dividends, at which time Goldman redeemed the preferred shares, according to Yahoo Finance. In 2013, Buffett exercised the warrants, receiving $2 billion in cash and purchasing 13.1 million shares of Goldman stock at a price of $115 per share. Goldman closed at $204.73 on May 1, 2019, meaning that the total gain on these shares is $1.2 billion.

Given that Berkshire has bought and sold shares of Goldman in the interim, that complicates the analysis a bit. Berkshire holds 18.4 million Goldman shares, per its latest regulatory filings, as reported by CNBC.

On the Bank of America deal, Buffett exercised his warrants in 2017, obtaining 700 million shares at $7.14 each, for just under $5 billion in total. At the time of exercise, those shares were worth $17 billion, creating an immediate $12 billion profit for Berkshire, according to another report by CNBC.

At a current price of $30.26 per share, the gain on these Bank of America shares has risen to $16.2 billion, and the dividend rate of $0.60 per share generates an additional $420 million of annual dividend income for Berkshire. Due to other purchases, Berkshire now owns 896.2 million Bank of America shares, worth $27.1 billion.

Buffett's $10 billion capital infusion into Occidental is contingent on that company's becoming the winner bidder for Anadarko Petroleum Corp. (APC), as described n more detail in this report. The deal with chocolate maker Mars in 2008 also was designed to bankroll a takeover attempt, as Mars was targeting chewing gum maker Wrigley.

In the Heinz deal, Buffett partnered with Brazilian private equity firm 3G Capital Management to acquire the food products company. After a subsequent merger with Kraft Foods, it is now a publicly-traded corporation again, as The Kraft Heinz Co. (KHC). Berkshire has a $10.7 billion stake representing about 27% of the market cap of Kraft Heinz.

Looking Ahead

As the examples above indicate, Buffett is flexible and creative in his pursuit of profit for Berkshire and its shareholders. His $112 billion stash of cash, as of the end of 2018, gives him ample leeway to play the role of banker.