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Buffett GE Bet Pays Off Topping Crisis Warrant Strike Price

Buffett GE Bet Pays Off
General Electric Co.’s gain of more than 20 percent this year is validating Warren Buffett’s $3 billion wager that the world’s largest maker of jet engines would rebound after the financial crisis. Photographer: Matthew Lloyd/Bloomberg

General Electric Co.’s gain of more than 20 percent this year is validating Warren Buffett’s $3 billion wager that the world’s largest maker of jet engines would rebound after the financial crisis.

GE climbed as high as $22.37 in New York, exceeding the $22.25 strike price of five-year warrants for the first time since Buffett’s Berkshire Hathaway Inc. agreed to buy them in October 2008. The Fairfield, Connecticut-based company has more than tripled since falling to $6.66, the lowest closing price in more than 16 years, in March 2009.

Berkshire purchased the warrants and $3 billion in preferred stock in an investment that helped Chief Executive Officer Jeffrey Immelt raise cash as credit losses mounted at GE’s finance unit in late 2008 after the collapse of Lehman Brothers Holdings Inc. The CEO’s efforts to shrink GE Capital and boost earnings from industrial units have led to a rebound in investor confidence.

“It was very critical at that point for GE to attract someone like Warren Buffett,” said Zahid Siddique, a portfolio manager at Rye, New York-based Gabelli & Co. who manages $1.4 billion including GE shares. “It showed confidence in the companies as well as in the broader U.S. economy. They’ve done OK in the time that’s passed.”

Goldman Sachs

Buffett’s investment in GE was patterned on a $5 billion purchase of Goldman Sachs Group Inc. preferred shares and warrants a week earlier, a transaction that helped shore up the most profitable firm in Wall Street history as it transformed itself into a bank to become eligible for bailout funds from the U.S. government.

The Berkshire CEO called GE “the backbone of American industry” and praised Immelt and Jack Welch, his predecessor, in an Oct. 1, 2008, interview on CNBC.

“They’re going to be around five or 10 or 100 years from now,” Buffett said. “If you buy at the right time, you’ll probably make some money.”

As financial firms reduced lending to hoard capital in 2008, Berkshire bought preferred shares of GE and Goldman Sachs and pledged to help finance takeovers by Dow Chemical Co. and Mars Inc. in exchange for stakes in those companies. GE paid $3.3 billion in October 2011 to redeem Berkshire’s preferred stock.

In addition to Omaha, Nebraska-based Berkshire’s investment, Immelt raised $12 billion by selling common stock in October 2008. He later announced plans to jettison some of GE Capital’s real estate investments and cut GE’s annual dividend to shareholders for the first time since 1938.

Credit Rating

Those moves didn’t keep Standard & Poor’s and Moody’s Investors Services from stripping the company of its top credit rating or prevent the shares from falling to the lowest level since November 1992.

GE has climbed from $18.36 on Jan. 3 as GE Capital received Federal Reserve approval to resume an internal payout to its parent that had been suspended as the financial crisis deepened. The stock pared earlier gains to close at $22.11 in New York, an increase of 0.4 percent.

Goldman climbed 0.6 percent to $121.36, above the $115 strike price on Berkshire’s warrants. The New York-based firm paid $5.65 billion to redeem the preferred stock in April 2011.

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