By now, you have probably heard that Warren Buffett has made his bet and invested billions of dollars in Goldman Sachs. The market reacted positively and Goldman is now trading at near $133 a share (up 6% on the day).
While I do see Buffett’s move as a vote of confidence in Goldman, Buffett does drive a hard bargain. He is getting 10% upfront in perpetual dividends and another 7% in options value. Jake at EconomPic Data has done the math.
Below are Buffett’s own words on the deal from a live CNBC interview as well.
Berkshire Hathaway will receive warrants to buy $5 billion in common stock at a strike price of $115 a share, which can be used at any time in a five-year period.
Using the good old Black–Scholes model with the pre-“Buffett Bounce” $115 Stock Price, a $115 Strike, 5 Years to Expiration, and 40% Volatility (roughly the level it has been trading) we get an “option” value of $47.89 per share. Berkshire can buy $5 Billion of Goldman stock with these warrants, thus he owns 43,478,261 shares. This amounts to $2.082 Billion. Taking the $5 Billion Berkshire paid less the value of the warrants at initiation equals $2.917 Billion for the Preferreds.
Berkshire will receive $500 Million per Year, which divided by that $2.917 Billion = 17.14% Yield. If Goldman is willing to capitalize at this value, it makes me question how desperate they really are…