If those warrants bear any resemblance to past deals that Berkshire has done, they may allow Berkshire to get free upside from current levels. In the deals that Berkshire has done since the financial crisis to make capital infusions into public companies, those warrants have turned what would have been perfectly good investments into truly great ones.
Consider Berkshire’s past warrant deals:
- With General Electric Company (NYSE:GE), Buffett invested $3 billion and received preferred stock yielding 10% and warrants to buy $3 million of common stock at $22.25. GE redeemed the preferred stock in 2011, netting Berkshire $1.2 billion in profit from dividends. Moreover, the warrants don’t expire until this October, and with the stock currently at $23.75, Berkshire is sitting on another roughly $200 million in paper gains.
- Berkshire did a similar deal to provide $5 billion to Goldman Sachs Group, Inc. (NYSE:GS), getting back 10%-yielding preferred stock and warrants to buy 43.5 million shares of Goldman common for about $115 per share. Goldman bought back the preferred in 2011, and Buffett said at the time that he anticipated exercising his warrants this year. With Goldman trading near $160, the warrants could give Berkshire an extra $2 billion in profit.
- Perhaps the most lucrative warrant deal Berkshire made involves Bank of America Corp (NYSE:BAC), where the company got 700 million warrants that expire in 2021 as part of a $5 billion financing package that included preferred stock yielding 6%. With the exercise price at $7.14 and the stock more than $5 per share above that level, the warrants alone are currently worth $3.5 billion.
By giving Berkshire both dependable income and an equity kicker, Buffett has gotten a lot more profit potential from his deals. Those are negotiations that most investors simply don’t have leverage to get done.
You can still be a value investor
You may not be able to get the same deals that Buffett has scored for Berkshire through the years. But by paying attention and getting into stocks of good companies when they’re artificially depressed, you can produce the same stellar returns in your own portfolio.
Tune in every Monday and Wednesday for Dan’s columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.
The article You Can’t Match Buffett’s Deals originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns shares of Berkshire Hathaway and warrants on Bank of America. The Motley Fool recommends Berkshire Hathaway, Goldman Sachs, and H.J. Heinz. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and General Electric.
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