Buffett Buys A Piece of Goldman

It's a good time to be teaching Corporate Finance. Buffett's latest move (making a substantial investment in Goldman Sachs) is bound to make it into a lot of class discussions. The Wall Street Journal's take (at least, as expressed by Georgetown finance professor James Angel) is

Berkshire's plan "is a sign of confidence from one of the nation's most respected investors," said James Angel, a finance professor at Georgetown University, who added that "sharp investors" now are "sniffing around the wreckage of the credit crunch to pick up good assets on the cheap."

I think the second part of the statement is closer to the truth than the first. Here's what the Sage of Omaha gets for his money

The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.

Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.

So, while the preferred isn't convertible, he gets what is essentially "synthetic convertible preferred". In essence, he gets his preferred payouts if the stock price doesn't rise, and the option to buy stock at a discount if the price is above $115. So, in effect he has a combination of preferred stock and an in-the-money call option. Barry Ritholtz prices the warrants at approximately $1.5 Billion, giving Buffett an effective yield of 14%, and cites another source who estimates their worth at $3.5B, and a yield of 17%.

Once again, Buffett has been able to make an investment at a very attractive price. In times where there's a lot of turmoil, having cash on hand makes it easy to buy companies (or parts of them) at a bargain, and according to Berkshire's first quarter, they had $31 Billion on hand. So, Buffett had cash at a time when Goldman desperately needed it. As a result, he got a great deal.

Just Damn. That guy is smart.

A New Website On The Investment Banking Field

A while back I came across a pretty good website for those of you who are looking to break into the Investment Banking field - Mergers and Inquisitions. Here's their "about" section:

Mergers & Inquisitions was launched after the author realized the web lacked good, free resources on investment banking, finance jobs and career advice in general for college students and recent graduates.

Most existing guides such as the Vault Guide To Finance Interviews or the Wet Feet guide are dry and don’t have much in the way of frank, practical advice with concrete examples. They’re also so boring that you may want to poke out your eyes after reading them (just kidding :). There are some high-quality finance-related sites and blogs out there, like Leveraged Sellout, Wall Street Oasis, and several others, but these have a different focus from what we’re doing here.

Since the author would like to keep his job (at least for now), he will have to remain anonymous. Feel free to email him. For resume review services, please refer to the resume review page.

The author seems to have just the right mix of helpful information and humor that should make it a hit. In addition, he's been doing it since November, 2007, so it looks like he might be around for a while.

I've added it to the sidebar, and also to my list of regular reads. Enjoy.

Tuesday Link Dump - The Merger and Private Equity Edition

I've been a little lax in blogging lately, but I'm still on the mend from the pneumonia. I'm still not anywhere near back to full capacity (and from what I've heard, I won't be for a while), but at least I'm on the mend. I now only have coughing fits mostly in the morning and late evening.
From what I've heard, this thing can take 4-6 weeks to completely beat.

For some reason, the articles that have caught my eye lately have been mostly related to M&A and PE topics. So, I'll just call this the M&A and PE edition of the Link Dump:

TheStreet.com has some interesting stock filters. In one, they screen for takeover candidates - firms with high price/cash flow multiples and low debt ratios.

A recent WSJ article chronicles how bondholders are bargaining more intensely for a bigger piece of the premiums in PE transactions in Bondholders Fight Back

In another PE-story, CNNMoney.com asks if there's a "private equity backlash".

James Altucher at TheStreet.com has a very nice primer on merger arbitrage (HT: Abnormal Returns)

Finally, the NY Times Online asks the question "Should You Buy When the Smart Money Sells?". The piece discusses the returns investors have historically made from "seasoned" IPOs - IPOs of companies that were taken private and then subsequently taken public a while later.

Time to get back to work - I've got a lot of catching up to do since I got almost nothing done last week.