Warren Buffett, CEO and chairman of Berkshire Hathaway, has stacked up quite a number of wins in the wake of the financial and mortgage crises that took place at the end of the 2000s. Throughout the crisis, Buffett and company played the role of the white knight to some of the largest businesses in the world, loaning them massive amounts of quick cash during their time of need.
When credit conditions were tight, Buffett had the ability to loan billions of dollars to some of the biggest financial institutions in the world, including Goldman Sachs and Bank of America. He was able to loan them money at high interest rates and received preferred stock that paid very high dividends. One such company that Berkshire Hathaway lent money to was Mars Inc., because they needed it during 2008 to finance the purchase of Wm. Wrigley Jr. Co. for $23 billion. Berkshire Hathaway loaned the Mars brand for $4.4 billion. They also purchased a minority interest in the company at the discount buyout price of $2.1 billion.
During this time, Buffett said: “Those of you who know me, know that I have been a big fan of Wrigley’s business model for many years, and I love their products. When you think of a business that’s easy to understand, with favorable long-term economics, and able and trustworthy management – you think of Wrigley. Bringing together these iconic, world-class companies combines Wrigley’s strengths with the deep resources and proven brand building savvy of Mars and will result in a powerful force for innovation and growth in the global confectionery marketplace.”
The Wall Street Journal tells us that Buffett and Berkshire are going to make at least $680 million worth of profit from this deal. They just sold the notes back to Mars at roughly 115% of face value plus interest.
This sale quickly follows the news from Berkshire Hathaway that they exercised warrants for 13.2 million shares of Goldman Sachs stock. The stock is roughly worth about $2 billion, and this is part of the payment to Buffett for loaning the financial institution $5 billion while the financial crisis was at its peak. This deal immediately followed the wake of the Lehman Brothers collapse, which was once the fourth-largest investment bank in the USA, and this is just one of a number of deals that Buffett made with the largest banks on Wall Street. All in all, Berkshire Hathaway provided a lifeline that was roughly worth about $24 billion that was spread out throughout the financial industry. This was one of the boldest and most successful US financial service bets in history.
The Goldman Sachs deal is very similar to the same one that was struck with Bank of America. The basic structure of the deal is that Berkshire Hathaway would receive preferred stock in exchange for a loan – that also paid a large dividend – plus warrants to buy more stock at a fixed price at a date in the future. In 2011, Goldman Sachs redeemed the preferred shares worth of $5 billion at a premium of 10%.
For the most part, the bets that Buffett made in the financial industry have ultimately paid off. He has made billions of dollars due to his bullish stance on US banks during the financial crisis. As an example, just two years later after Buffett lent a hand to Bank of America; he was able to tell the shareholders of Berkshire Hathaway that he made a paper profit of $5.27 billion due to this deal.