Warren Buffett’s Berkshire Hathaway Inc. is poised to become one of Goldman Sachs Group Inc.’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis.
Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under a deal announced by the companies today, Buffett’s firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million.
The new deal reduces some of the risk for Berkshire, which would have had to spend about $5 billion to exercise the warrants and then sell the shares -- about 9 percent of the bank’s outstanding stock -- to cement a profit. For Goldman Sachs, the fifth-biggest U.S. bank by assets, the plan seals Berkshire’s participation as a shareholder in the company and reduces the dilution for other investors.
“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, Alabama, 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 fell below that level in November. Goldman Sachs gained 43 cents, or 0.3 percent, to $146.54 at 4 p.m. in New York. The bank has advanced 15 percent 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 investment also helped Goldman Sachs raise $5.75 billion from a stock offering in two days.
Buffett, 82, invested $5 billion for preferred stock with a 10 percent dividend in 2008 and received the five-year warrants. Goldman Sachs paid Omaha, Nebraska-based Berkshire a 10 percent premium when it redeemed the preferred shares in 2011.
“We are pleased that Berkshire Hathaway intends to remain a long-term investor in Goldman Sachs,” Lloyd C. Blankfein, 58, the New York-based bank’s chairman and chief executive officer, said in the statement.
If the warrant agreement announced today were struck based on the average stock price of the 10 trading days through yesterday -- $150.16 -- Berkshire would receive $1.53 billion of stock. That would be equal to about 10.4 million shares, based on today’s closing price.
Buffett is “putting up less capital than he otherwise would have,” Cook said in a phone interview. “Buffett must feel like he has a better place to deploy the capital” than in Goldman Sachs stock.
Buffett didn’t immediately respond to a request for comment sent to an assistant.
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 more than $16 billion of Wells Fargo & Co. and $2.1 billion of U.S. Bancorp. Berkshire also has a preferred stake and warrants in Bank of America Corp., the second-largest U.S. lender.
An annual evaluation by the Federal Reserve completed earlier this month found that Goldman Sachs’s Tier 1 common equity could fall to 5.8 percent of its risk-weighted assets in a severe economic downturn, just above the 5 percent minimum.
The Fed also ordered Goldman Sachs and JPMorgan Chase & Co., the world’s two biggest trading firms, to resubmit their plans for managing capital by the end of September to address weaknesses in their planning processes.
The so-called stress tests may have played a part in Buffett’s decision to take a smaller stake in Goldman Sachs than he was entitled to, said Jeff Matthews, a Berkshire shareholder and author of books about the investor.
“Maybe owning that big a stake in Goldman was a position he didn’t need to be in,” Matthews said. “It’s different than owning Wells Fargo or U.S. Bancorp. It’s just a different animal.”