NEW YORK (
stock price still has a ways to go before $3 billion in stock options purchased by
in October 2008 are in the money.
Buffett's options allow him to buy General Electric shares at $22.25 any time until Oct. 1 2013. GE shares were at $24.50 when the deal was announced after the market closed on Oct. 1 2008, though they opened the following day at $22.83 on the heels of GE's announcement that it would offer $12 billion in new stock the same day as the deal with Buffett. Buffett also bought $3 billion in preferred shares paying a 10% dividend at that time.
Buffett's investment in General Electric would seem to be enough to silence critics of the company who say it is essentially just financial engineering, with big losses hiding in the conglomerate's lightly-regulated and poorly-understood financial unit. If GE is really making things up, Buffett would have sniffed it out, as he did in rejecting an overture by Lehman Brothers on in March 2008.
While climbing steadily at time, General Electric shares have struggled to maintain momentum for an extended period. The stock hovered around the $16 mark for the six months prior to March 4, when it began a sharp climb that led to a new 52-week high of $18.94 on March 24.
Since then, however, General Electric's shares have taken a breather, trading roughly flat with the S&P 500 and the
Industrial Select Sector SPDR
a widely followed ETF with a heavy GE weighting. General Electric has also lagged the
Financial Select Sector SPDR
the past few weeks. Year-to-date the stock is up about 23%.
GE's stock is probably headed higher, but the company is so big and diverse, it may take some time. Investors want clarity on how proposed financial reform rules will affect GE, and they want to see that GE is making progress shrinking its financial unit. At the end of 2009, GE Capital's balance sheet had only shrunk to $650 billion from $661 billion at the end of 2008. That is scarcely different from the rest of GE, which has seen assets drop to $782 billion from $798 billion over the same time period.
Buffett has had more success with a similar investment he made in
a week ahead of the deal with General Electric. Buffett bought $5 billion in Goldman preferred stock in a deal announced Sept. 23, also with a 10% dividend. His options to buy up to $5 billion in Goldman common stock at $115 per share are solidly in the money, as the securities firm's shares closed Wednesday at $176.36, up 2% for the day.
The Oracle of Omaha appears to have seen ahead of time the Goldman investment was a better one since he took a bigger stake in the securities firm than he did in GE-- especially when you consider that, even after Goldman's outperformance during the past year and a half, GE's market cap is more than twice that of Goldman.
Written by Dan Freed in New York