Close on the heels of his $5-billion capital infusion in Wall Street bank Goldman Sachs (See: Warren Buffett invests $5 billion in Goldman Sachs) Warren Buffet has infused $3-billion in GE, which is raising $15 billion in capital, in a deal coincidentally facilitated by Goldman Sachs.
Its financial business stung by a growing credit crisis worldwide, said yesterday it was launching a stock offering to raise $12 billion in cash and conducting a private deal with Buffett, similar to the one he struck with Goldman Sachs a week ago. Co-incidentally, Goldman is handling GE's stock offering.
As with the Goldman deal, analyst say GE is making step concessions to Buffett.
According to the terms of the 5-year deal, Buffett's investment vehicle Berkshire Hathaway will buy $3 billion of GE's preferred stock at a guaranteed 10-per cent dividend that are callable by 2011. It further gives Berkshire warrants to purchase $3 billion of GE's common stock at a strike price of $22.25 a share. The warrants can be exercised anytime through 2013.
Commenatators say that Warren Buffett is the only major financial institution that has ready cash to buy assets cheap, calling him as a mid-western vulture fund eating off the debris of the current financial chaos.
GE will also sell $12 billion in common shares to investors making the diversified industrial group the latest company to be forced to raise capital in recent weeks. It said the public offering of $12 billion of common stock will be priced before the US stock market opens Thursday.
The fund raising was required to instill investor confidence in the company, as GE Capital, its finance arm that generates nearly half of GE's revnues, had lost 42 per cent in stock value since last year that had left investors worried, making this infusion look close to a bail out.
In a statement GE said "unprecedented weakness and volatility in the financial-services markets," has forced it to take these steps as a protective measure and raising capital was only to strengthen its capital and liquidity.
GE's chief executive, Jeffrey Immelt, said ''the proceeds would help to protect the company's triple-A credit rating and could potentially fund acquisitions,'' and said the added liquidity will enable GE to "play offensive in this market should conditions allow."
In shrewdly making his second major investment in a week, Buffett was showing his confidence in the US financial system. In a statement he said, ''GE is the symbol of American business to the world. I have been a friend and admirer of GE and its leaders for decades. They have strong global brands and businesses with which I am quite familiar. I am confident that GE will continue to be successful in the years to come.''
The conglomerate whose finance arm GE Capital, seen as a financial sector stock, deals in credit services to 130 million customers including retailers, consumers, mortgage lenders and car dealers, has investors fretting over GE's exposure to the credit crunch and pounding the company's stock.
GE leaders who had often said that GE Capital had no real problems, changed tracks last Thursday, ruling out raising dividends through 2009 for the first time in the company's history and stopped a stock buy back programme to maintain its AAA credit rating that's so important to its financials business.
Investors interpreted these as signs of the company having become a victim of the financial crisis, as earlier in April it rerported its first decline in quarterly profit since 2003, with a 12 per cent drop in earnings expectations for 2008, which last week raised to as much as 15 per cent.
The loweringg of earning expectations on 11 April had led to GE shares registering their highest fall in two decades. The company had then blamed underperforming its target of $2.42-a- share mainly on the credit-market turmoil.
The credit miss also led to renewed investors' calls for GE to sell off larger chunks of the company such as GE Appliances, NBC Universal or its consumer- finance unit GE Money. GE downed by credit woes in Q1 2008; reports first decline in profits since 2003
This time, too, concerns about the financial health of GE Capital, which accounts for 45 per cent of its revenue, sent General Electric shares dropping by 10 per cent before the company announced the capital-raising plans and said it remains on track to meet the financial goals outlined last week. GE shares have lately been down 4 per cent. For a detailed analysis on GE's current woes, see: General Electric shock and after