It was uncovered today that Warren Buffet worked with Goldman Sachs to restructure the warrant underpinning. The restructure allowed Buffet to take all the profit generated by the warrants, he gained as ownership purchased with 30+ billion dollars of Berkshire Hathaway, in stock.
The restructure also helps Goldman Sachs financial statements, and as mentioned below benefited GS in many different aspects, which has been reflected in the price of Goldman Sachs (NYSE:GS) higher this morning on the warrant restructure and execution of Warren Buffet position, or better put the actual execution of his warrants and warrant position by Goldman Sachs, set Warren up to not have to pay any money in return to getting all the profit owed to him by GS due to the fact the stock price is far above the warrant price.
The stock price is currently greater than 30 dollars above the warrant price that allows Warren Buffet like a call option to buy the stock at the strike price which given almost a year ago is now much lower than the current stock price was has been in a major uptrend on the weekly charts, and now heading towards a year in an uptrend with only small corrections that corresponded with corrections in overall markets and indexes.
GS consolidation has been tighter than the overall averages, which can easily be seen on the weekly charts. When a stock has a tighter consolidation, it displays strength and a lower beta which means the stock is less correlated with the market and starting to show independent strength based on the company accelerating EPS and Sales over many quarters even years.
This independent strength than leads to a increase in Relative Strength line usually shown on a stock chart as a line that shows how the stock is performing against its most relevant index.
For GS to be able to give Buffet stock, without having to execute the trade, which would require Buffet to put up some cash as a marginable security against the trade, and the company would have to take a hit to shareholders' equity on the balance sheet as well as a loss, which could also be considered increased debt and even debt interest.
In the past Warren Buffet has said that Goldman Sachs is one of the best investment banker/broker/m&a advisers, etc firm on Wall Street.
His initial multi billion dollar equity investment gave Goldman Sachs a lot of money to do a powerful amount of Wall St. deals that created hundreds of millions of dollars in increased revenues. This increased sales and EPS pushed the stock price up over the last year.
Now with Warren Buffet taking no money out of Goldman Sachs but in essence increasing his investment company, Berkshire Hathaway, ownership position (and accompanying exposure to loss on company bad performance including decreased sales, or decreased EPS that would lower shareholder equity, and decrease the market share price.)
But Warren Buffet does not seem to worry the above could happen, he thinks taking more stock at a discounted, well from one point of analysis "free stock" that every dollar of value is a dollar of profit for BK. Pretty ingenious. The stock was bought with a value differential of a minor derivative that has been around a long time and used for IPO as well as M&A when there is a exchange of stock used as the payment financial vehicle for the take-over.
Warrants were popular back in the day and continue to be popular because they give the buyers and sellers exec mgmt, corporate officers, or owners an option-like instrument that is leveraged and gives them multiple returns on a upside or positive moves. The upside over using an option in the offering is that it does not count against the float, or total number of shares outstanding, so there is no dilution to the value of each investors' shares, which preserves the rounds of investors monies from being diluted and lowering the return on the investors' money or some cases even causing a loss.
So based on his actions and willingness to take his warrant profits in stock speak much as always "warrants speak louder than word"
Successful investing to you
Alexander L Wolf
Chief Investment Officer
Wolf Family Trust
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.