The Oracle of Omaha has done it again. After investing $5 billion in Goldman Sachs on Sept. 23, he’s now agreed to buy $3 billion of perpetual preferred stock from General Electric Co. in a similar deal.
The news came paired with the announcement that GE will be offering at least $12 billion in common stock. In doing so, GE, which gets nearly half its revenues from its financial arm, joins the ranks of other ailing financial behemoths that have been forced to raise capital recently.
The move comes off a difficult two and a half weeks for GE’s CEO, Jeff Immelt. After issuing a statement on Sept. 14 designed to reassure investors, GE admitted to problems the finance unit was causing last week with several major announcements. He cut the company’s third-quarter and full-year earnings guidance, “reflecting unprecedented weakness and volatility in the financial services markets,” the company said in a statement. In addition, he suspended stock buybacks and said GE was going to maintain its dividend, but also said GE was not going to raise it.
Earlier today, GE’s shares, already battered by concerns in recent weeks about its financial unit’s exposure to the credit crisis, fell by as much as 8%, following Deutsche Bank analyst Nigel Coe’s move to lower his 2008 earnings estimate by 9%, along with a downward adjustment for 2009 expectations. Spreads on credit default swaps also jumped significantly, too. According to the Wall Street Journal, citing Phoenix Partners Group, it now costs $500,000 to protect $10 million of bonds for five years, down from $650,000 prior to the announcement.
The preferred stock deal with Buffett has a dividend of 10% and is callable after three years at a 10% premium. Berkshire Hathaway will also receive warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Immelt said in a statement that the deal is designed to enhance GE’s flexibility and “allows us to execute on our liquidity plan even faster. Plus, he added, “it gives us the opportunity to play offense in this market should conditions allow.” He reiterated his commitment to GE’s AAA rating and said that GE continued to meet its commercial paper needs. While still down for the day, GE’s shares were up on the news.
How can you manage smarter? Bloomberg Businessweek contributors synthesize insights from the brightest business thinkers, critique the latest management trends, and comment on leaders in the news.