Oct 9, 2008

Business - Buffett to the rescue

Is it a bird? Is it a plane? No, it’s SuperWarren

SHORT, septuagenarian and bespectacled, Warren Buffett does not resemble a typical superhero. Yet twice in barely a week he has swooped to rescue two of the world’s greatest companies from tight spots. First it was Goldman Sachs, which had a near-death experience after the collapse of Lehman Brothers. And on October 1st it was GE’s turn to breathe a sigh of relief, as the “Sage of Omaha” quashed market worries about its health by investing $3 billion in the huge conglomerate.

As a famously canny value investor, it is hardly surprising that Mr Buffett has an excellent understanding of his own value. As with the investment in Goldman, the terms of the investment being made in GE by his company, Berkshire Hathaway, are fantastical. As long as Hank Paulson, America’s treasury secretary, manages to steer the economy away from financial Armageddon, Mr Buffett is sure to add to his reputation and his fortune. Indeed, were he not a philanthropist, committed to giving away his billions, the tough terms he has negotiated with both firms might have prompted accusations that he is taking advantage of the desperate. His preferred stock in GE will pay a dividend of 10%, and he has the right to buy a further $3 billion at a price of $22.25, below the share price when his investment was announced.

GE is offering a further $12 billion of new shares to the public, who may be inspired to follow in Mr Buffett’s footsteps, though ordinary shares are a far riskier bet. But Mr Buffett has issued a much-needed vote of confidence in the firm and its embattled chief executive, Jeffrey Immelt. Though it is hard to fault Mr Immelt’s strategy of shifting GE’s portfolio from low-margin to high-margin activities, his seven years at the helm have not impressed investors. GE is worth barely half what it was a year ago, although with a market capitalisation of $244 billion it is hardly going out of business, which is why Mr Buffett can invest with even greater certainty of making a killing than he did with Goldman.

Most of GE’s recent problems have come from its financial arm, GE Capital, which it has belatedly decided to shrink somewhat. As well as some exposure to subprime mortgages and problems in its vast credit-card portfolio, there are growing concerns about its exposure to commercial property, which has been pretty solid so far but is vulnerable to a sharp economic downturn. Investors have also worried about what would happen to GE’s hybrid industrial-financial business model if it lost its cherished triple-A rating. Happily S&P, one of the leading rating agencies, said Mr Buffett’s investment and the decision to raise more cash reinforced the triple-A rating.

The credit crisis surely reduces the likelihood of GE spinning off GE Capital, which can rely on the predictable cashflow from GE’s industrial units to provide liquidity even when the credit markets are dry. In the summer Mr Immelt added a loyal backer by bringing in Abu Dhabi’s Mubadala sovereign-wealth fund as a big shareholder. Now he has strengthened his job security even more by bringing in his friend, the famously loyal Mr Buffett.

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