How to Get $1.2 Billion of Goldman Sachs Shares Without Really Trying (err, Paying)

 

Warren Buffett’s Berkshire Hathaway and Goldman Sachs revise terms of warrants to provide for cashless exercise.

When everyone thought the financial world was crumbling and threatening to suck Goldman Sachs down along with it, Warren Buffett stepped up to the table and invested $5 billion in a tranche of Goldman’s preferred stock and got warrants to purchase common stock if they paid another $5 billion.

We are a bit late to this party [Ed.:  Not really, see comments to this Forbes article, where we lay down some knowledge and ask about the correction ], but in March, Goldman Sachs and Berkshire Hathaway changed the terms of the warrants allowing for net cashless exercise of the warrants.  In other words, Buffett gets to pay for the shares by having Goldman Sachs withhold other shares that would have been deliverable upon exercise if Buffett would have actually exercised with actual money.  Here is the money quote:

“Payment of the Exercise Price for the Shares thereby purchased will be made by having the Corporation withhold, from the shares of Common Stock that would otherwise be delivered to the Warrantholder upon such exercise, a number of shares of Common Stock equal to the Aggregate Exercise Price divided by the Average Closing Price.”

In English, Goldman Sachs will issue the number of shares based on the amount by which the average closing price (based on the average of the 10 trading days preceding October 1, 2013) exceeds $115/share.

By the Numbers

GS is trading at $142.57 at this writing.  Here is the deal assuming Buffett exercises at the current market price:

Before:

Number of   Shares Underlying Warrants

Exercise   Price Per Share

Goldman   Sachs Gets

Berkshire Hathaway   Gets

43,478,260

$115

$5 billion

43,478,260 shares of GS   common stock
After:

Number of   Shares Underlying Warrants

Exercise   Price Per Share

Goldman   Sachs Gets

Berkshire Hathaway   Gets

43,478,260

$115

Zip*

8,407,769 shares of GS   common stock** (current market value of $1.2 billion)

                                               

*Technical term.
**Calculated as 43,478,260-((43,478,260*115)/142.57)

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