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Buffett Puts $5B Into Bank of America!


Parsad
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“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That’s what customers want, and that’s the company’s strategy.”

 

 

 

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Unbelievable!  I can't friggin' believe this.  I didn't think Buffett would invest in it because of the huge investment in Wells, but he did.  How crazy!  I knew somebody had to step in and invest, it was just too cheap, but I didn't think it would be him and at this point. 

 

The exact same thing happened last time when I was talking about WFC and GE in 2008/2009.  The Oracle himself stepped in then too.  And now again, all those guys who were doubting Berkowitz are going to sing a different tune in a couple of years.  Ok folks, what is the next big idea?  Goldman?  ;D  Cheers!

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“Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That’s what customers want, and that’s the company’s strategy.”

 

Amazing, a slam dunk if there was one. Nice strike price for the warrants for Buffet and not much dilution for BAC. Looks more like a vote of confidence

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700 mill warrants @ 7.14 + 6% prefered....not bad for a stamp of approval

 

Bank of America Corporation announced that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6% per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5% premium. In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.

 

He basically pays a very little premium against what the BAC-WTA warrants went for in public, has a 10-year period instead of an 7,5 year period AND got preferred stock? Am I correct? Insane deal if you ask me.

 

What are others thinking?

 

 

Gratz to ERIC and others by the way! I am confident this will work out just fine.  :)

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I also did not think that Buffet will step out at this stage. I did not think that price swing was creating that much of a problem for BAC at this time. Anyway, good to see that Buffet is seeing something we saw it too. his deal is pretty sweet though.

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It's going to suck being a value investor when Buffett is gone, I can tell you without a doubt that if not for this Buffett investment there was, even if this is a remote chance, a chance that the shorts/media could have distorted the image of the brand to the point where it would have affected the fundamentals.

 

 

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Great deal for Buffett but recognize he is not buying the common stock.  If Buffett were Joe Schmo and his investment didn't provide a self fulfilling confidence, would he have simply purchased the common?  And if the common were such a great deal, why didn't he simply buy the common in the open market? -- it's not like there isn't enough liquidity for him.  And this is a tiny investment for Berkshire and Buffett.

 

And the original thesis at $11-12/share when Berkowitz et al were screaming that the stock was a buy never envisioned having to sell a large pfd deal to Buffett after the common had been cut in half in order to make money in the future on the common stock investment.  And so much for Bank of America swearing up and down that they didn't need to sell equity...not only giving away dilutive warrants but also paying 6% on a pfd when interest rates are at all time lows.  So the thesis unquestionably devolved.  And now we hear BAC leaking that normalized earnings are much further out than originally anticipated, if ever.

 

Nevertheless, his vote of confidence changes the equation and should obviously be beneficial for the common stockholders.  But note if you are a true LT shareholder in GS, you're still holding a stock that is near the levels Buffett originally invested.  Buffett gets a different deal than us.

 

Genuinely happy for the folks that have done the work and will hopefully reap the rewards.  Stock still has a long way to go to get back to $11-12 but the odds of getting have dramatically improved.  On Berkowitz, let's see if holds as long as Buffett -- after Berkowitz antics w PFE and FRX, I would never trust him...he hypes his positions and then sells them when the pop. 

 

And be honest and admit that if BAC goes down, BRK would have been in a world of trouble as would have the country.  The investment is no doubt designed to instill confidence in the system as much as capitalize on possible money making opportunity.

 

 

 

 

 

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Great deal for Buffett but recognize he is not buying the common stock.  If Buffett were Joe Schmo and his investment didn't provide a self fulfilling confidence, would he have simply purchased the common?  And if the common were such a great deal, why didn't he simply buy the common in the open market? -- it's not like there isn't enough liquidity for him.  And this is a tiny investment for Berkshire and Buffett.

 

 

Prior to this announcement, the market cap of BAC fluctuated between $60 and $70 billion.  If he tried to buy a slug of $5 billion of shares on the open market, what do you think would have happened to the price of the stock?  It would have soared a lot higher than $7 a share by the time he was done.

 

Instead, he lends $5 billion @ 6% and receives warrants for 700 million shares with a strike of ~$7 per warrant.  In other words, he gets to invest $5 billion in Bank of America's common without moving the price.

 

I don't claim to have any personal insight into Warren's thinking, but he's not making this investment because he's trying to earn 6% on his cash.  He's buying into this for the warrants/common.

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This is certainly interesting. But these pfd that were issued, can it be looked at as BAC raising capital in a roundabout way?

 

Edit: the reason I ask this is because I remember when the financial crisis first hit in 2008. The first time the feds met to reduce interest rates, they reduced them by .5%, instead of the .25% increments. The market applauded this move, but I remember someone on this board (might have even been eric) brought up the fact that if the Feds had to reduce rates by this much, the problems are deeper than most investors realize. We all know how that turned out.

 

Also, I remember after the GS investment by WB, Goldman tanked the coming months...

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Great guess on a potential preferred deal by Parsad from that trainwreck BAC thread a couple days ago:

 

This thing is so irrationally priced that somebody has to walk in and take a huge stake.  It won't be Buffett because of his stake in Wells, but there has to be some large institutions that would just say to themselves, let's strike a $20B preferred deal like Buffett did with Goldman and kill the shorts.  Somebody is going to buy into this thing at this price...just crazy!  Cheers!

 

I'm also very surprised it was Buffet afterall.

 

Parsad - you should also start a fund or something. :)

 

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Hey guys,

 

I have a question about this.  From the perspective of BAC, how is this any better than just offering $5bn in common equity?  I see the WEB halo effect, but beyond that I can't see how this is a relatively good deal for them, or for common shareholders.  I see the same level of dilution as common (with the warrants), but with a pricier yield to service, a more senior form of capital above common and a redemption fee of $250mm.

 

I also think it's a little bit strange that BAC is resorting to a capital raise at this time.  They've been talking about how well capitalized they are for the past couple months.  Market's gonna market and screw around with your stock price, but this seems like an extremely expensive bit of PR.

 

Thoughts?  I feel like I'm missing something fundamental.

 

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"If he tried to buy a slug of $5 billion of shares on the open market, what do you think would have happened to the price of the stock?"

 

C'mon...silly.  He doesn't have to buy $5B common in a single day or even a single week...BRK makes $5B investments in a common stock year in year out.

 

I don't claim to have any personal insight into Warren's thinking, but he's not making this investment because he's trying to earn 6% on his cash.  He's buying into this for the warrants/common.

 

Not true.  Very few opportunities to put that amount cash to work at 6% while also getting the option for free upside.  Expensive for a company that supposedly was financially sound but nice deal for Buffett, especially since a "Buffett investment" creates confidence.  Buffett did well on his GS and GE investments but the common shareholder has not done so great in eithe company.

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Hey guys,

 

I have a question about this.  From the perspective of BAC, how is this any better than just offering $5bn in common equity?  I see the WEB halo effect, but beyond that I can't see how this is a relatively good deal for them, or for common shareholders.  I see the same level of dilution as common (with the warrants), but with a pricier yield to service, a more senior form of capital above common and a redemption fee of $250mm.

 

I also think it's a little bit strange that BAC is resorting to a capital raise at this time.  They've been talking about how well capitalized they are for the past couple months.  Market's gonna market and screw around with your stock price, but this seems like an extremely expensive bit of PR.

 

Thoughts?  I feel like I'm missing something fundamental.

 

You are missing absolutely nothing.

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