Berkshire Hathaway (BRKB) just announced a $5 billion investment in Bank of America (BAC). This deal should not be a big surprise as Berkshire and its leader Warren Buffett have a history of making billion dollar bets on troubled companies. The most recent example of that is Buffett’s investment of $5 billion in Goldman Sachs (GS) during the financial panic. He has made similar moves in the past with an investment in GE being made just before the Goldman Sachs deal.
Bank of America would have to be in pretty bad shape to take a deal like this because Buffett drives a hard bargain. For the year-to-date through today, BAC is down approximately 50%. Yikes. It is likely that this deal was done in part to arrest that slide. And, in fact, Bank of America shares did bounce after the announcement, but Berkshire shares tumbled.
Buffett’s dealmaking prowess is legendary and, in fact, a couple of years ago Kurt Brouwer is suggesting the U.S. Treasury put Buffett in charge of its negotiations with troubled companies seeking TARP money. Alas, the government did not take advice him.
Berkshire Hathaway’s stock has fallen along with the stock market overall. Plus, it has also been taking a few hits due to natural disasters that are likely to hurt Berkshire’s insurance business (earthquakes, tsunamis and general bad weather around the world). Today, the B shares (BRKB) closed at $68.99 per share.
However, Berkshire is a unique company with a legendary investor at the helm. It also has excellent businesses and one other important attribute — cash. It has billions in cash on hand and it also has the ability to put that cash to work in ways ordinary investors — or even the U.S. Treasury — cannot match.
