Amended GS Warrant Terms

[jay21]

A brief:  http://www.reuters.com/article/2013/03/26/goldmansachs-brief-idUSWEN0089420130326?type=companyNews&feedType=RSS&feedName=companyNews&rpc=43

 

Will update when new info comes in.

 

 

(Reuters) - Goldman Sachs Group Inc and Berkshire Hathaway Inc have amended the warrants Berkshire holds as part of the lifeline it gave Goldman during the financial crisis, a change that Goldman said would ensure Berkshire remains a long-term investor in the bank.

 

Goldman said on Tuesday that in place of the warrants, the firm will give Berkshire a number of shares reflecting the difference between the warrants' original exercise price of $115 and the average closing price of Goldman's stock for the 10 trading days up to Oct. 1 of this year.

 

http://www.reuters.com/article/2013/03/26/goldmansachs-berkshire-idUSL2N0CI0IX20130326?type=companyNews

 

[jay21]

Better article:  http://www.forbes.com/sites/steveschaefer/2013/03/26/goldman-sachs-reworks-warrants-held-by-buffetts-berkshire/?partner=yahootix

 

The amended agreement changes the terms of the warrants from cash settlement to net share settlement. Essentially, Buffett had the right to purchase 43.5 million shares of Goldman at $115 apiece until October 1, 2013. Under the new terms, Buffett will receive “the number of shares of common stock equal in value to the difference between the average closing price over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant (43,478,260).”

 

The short form: because Goldman Sachs would have to compensate Berkshire for the difference between the stock price and the exercise price, the firm will instead deliver to Berkshire the commensurate amount of shares equivalent to that difference.

 

“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 said in a statement announcing the new terms. “I have been privileged to have known and admired Goldman’s executive leadership team since my first meeting with Sidney Weinberg in 1940.”

[LC]

paying in shares instead of cash...if buffett agreed he must think GS is still undervalued?

[jay21]

paying in shares instead of cash...if buffett agreed he must think GS is still undervalued?

 

I think so.  But notice he did not want to exercise and make it a huge position.  He only wants the difference between the strike and market price.

[valueinvesting101]

How is the tax treatment in this case? Does BRK need to pay any tax on gain or do they pay tax only when they sell their shares?

[arbcon]

tax arbitrage.

[treasurehunt]

paying in shares instead of cash...if buffett agreed he must think GS is still undervalued?

 

I don't think this amendment says much about Buffett's opinion on whether GS is undervalued or not. According to the original terms Berkshire would pay 5 billion and get 43 million shares of GS in return. According to the amended terms, Berkshire pays nothing and gets 9 million shares or so (depending on the GS share price in October). I think the article Jay quoted is wrong when it suggests that GS will now be paying in stock rather than in cash; there was never going to be any cash payment from GS, as I understand the warrant terms.

 

If anything, this indicates to me that Buffett would rather own a modest position in GS than a big one. Not so bullish for GS stock, perhaps. But as a GS shareholder, I am happy that the dilution will probably be less than I anticipated (assuming GS is still trading under IV in October).

[jay21]

paying in shares instead of cash...if buffett agreed he must think GS is still undervalued?

 

I don't think this amendment says much about Buffett's opinion on whether GS is undervalued or not. According to the original terms Berkshire would pay 5 billion and get 43 million shares of GS in return. According to the amended terms, Berkshire pays nothing and gets 9 million shares or so (depending on the GS share price in October). I think the article Jay quoted is wrong when it suggests that GS will now be paying in stock rather than in cash; there was never going to be any cash payment from GS, as I understand the warrant terms.

 

If anything, this indicates to me that Buffett would rather own a modest position in GS than a big one. Not so bullish for GS stock, perhaps. But as a GS shareholder, I am happy that the dilution will probably be less than I anticipated (assuming GS is still trading under IV in October).

 

I think this post hits on the biggest points. 

 

1.  Buffet is receiving less shares than if he exercised.

2. This probably tax efficient.  Not sure what his basis is, but this should be a taxless transaction and he would owe a good chunk of taxes if he converts to cash. 

3. The dilution to the common is less than anticipated.

 

#3 I find the most interesting because I am wondering if he will do something similar with BAC.  If i were a GS holder, it would say to me, he would rather own $x of GS than receive $(x-y) in cash.  y being taxes.

[LC]

paying in shares instead of cash...if buffett agreed he must think GS is still undervalued?

 

I don't think this amendment says much about Buffett's opinion on whether GS is undervalued or not. According to the original terms Berkshire would pay 5 billion and get 43 million shares of GS in return. According to the amended terms, Berkshire pays nothing and gets 9 million shares or so (depending on the GS share price in October). I think the article Jay quoted is wrong when it suggests that GS will now be paying in stock rather than in cash; there was never going to be any cash payment from GS, as I understand the warrant terms.

 

If anything, this indicates to me that Buffett would rather own a modest position in GS than a big one. Not so bullish for GS stock, perhaps. But as a GS shareholder, I am happy that the dilution will probably be less than I anticipated (assuming GS is still trading under IV in October).

 

I think this post hits on the biggest points. 

 

1.  Buffet is receiving less shares than if he exercised.

2. This probably tax efficient.  Not sure what his basis is, but this should be a taxless transaction and he would owe a good chunk of taxes if he converts to cash. 

3. The dilution to the common is less than anticipated.

 

#3 I find the most interesting because I am wondering if he will do something similar with BAC.  If i were a GS holder, it would say to me, he would rather own $x of GS than receive $(x-y) in cash.  y being taxes.

 

It must be for tax and simplicity reasons....GS could in theory issue all 43mln shares to BRK and then immediately buyback & retire 34mln to leave BRK with the 9mln...it's just a whole lot easier (and again, probably tax efficient) this way.

 

Either way, nothing is stopping BRK from simply selling their stake, or selling the warrants before they exercise. So either WB wants a stake in GS, or there is some mutually beneficial tax issue which I'm not aware of.

[treasurehunt]

The GE warrants have also been amended similarly. From GE's 10K: "The terms of the warrants were amended in January 2013 to allow for net share settlement where the total number of issued shares is based on the amount by which the average market price of GE common stock over the 20 trading days preceding the date of exercise exceeds the exercise price of $22.25."

 

Berkshire will end up with an insignificant stake in GE at current prices.

[Grenville]

The GE warrants have also been amended similarly. From GE's 10K: "The terms of the warrants were amended in January 2013 to allow for net share settlement where the total number of issued shares is based on the amount by which the average market price of GE common stock over the 20 trading days preceding the date of exercise exceeds the exercise price of $22.25."

 

Berkshire will end up with an insignificant stake in GE at current prices.

 

Thks for the info!

[jeffmori7]

Ok so does this mean that Buffett won't exercise his warrants with both GE and GS, but just be paid in stock the net profit? Does it make any difference except the size of the position?

 

Was it Buffett idea or GE and/or GS?

 

I had assumed that one reason Buffett had to keep a lot of cash this year was to exercise those warrants, costing him about 10 billions$, but it seems he is still looking for other opportunities to use this cash. Am I wrong?

[treasurehunt]

I had assumed that one reason Buffett had to keep a lot of cash this year was to exercise those warrants, costing him about 10 billions$, but it seems he is still looking for other opportunities to use this cash. Am I wrong?

 

I too thought that Buffett would use 8 billion to exercise the GS and GE warrants, but it doesn't look like he is very keen to do that. Might be a good question to ask at the annual: why did Berkshire settle for small positions in both GS and GE? I can see why GS and GE might want to avoid issuing shares; they probably have no great need for more cash right now.

[jeffmori7]

Sure it is good for both GE and GS not to dilute more the shareholders as they no longer need more cash.

 

But for Berkshire,in the short term it appears better as it doesn't involve paying for the stocks, they get their net profit in stock-equivalent, but longer term they have a smaller stake and less future dividends. For GE, they probably don't like it enough to get a size able stake, but for GS, considering Buffett comments, I am curious.

[JBird]

Does anyone have an estimate of what the transactional cost to Berkshire would have been to acquire and sell $5 billion of GS stock on the open market?