At the height of the financial crisis, Warren Buffett made a critical $3 billion investment in Dow Chemical.
In return, Berkshire Hathaway received preferred stock paying an 8.5% annual dividend.
Buffett’s company ultimately made an estimated $3 billion in profits from stock sales and dividends.
Warren Buffett invested $3 billion in Dow Chemical during the financial crisis, helping the manufacturer complete the buyout at a time when investors, creditors and companies were taking cover.
This is one of Buffett’s signature deals, providing much-needed cash to an ailing company and generating healthy returns.
The chemistry of finance
Dow agreed to buy Rohm & Haas in July 2008 for about $19 billion, including debt, and roped in Warren Buffett. Berkshire Hathaway To help with finances. The acquisition was part of Dow’s strategy to shift its focus from bulk chemicals to higher-margin specialty chemicals.
Buffett agreed to exchange $3 billion for 3 million Series A convertible preferred shares that pay an 8.5% dividend, or $255 million a year. Preferred stocks usually pay higher dividends than common stocks, and holders get priority when it comes to stock payouts.
Beginning in April 2014, Dow had the option to convert some or all of Berkshire’s preferred shares into common stock, at a rate of 24.201 common shares for each preferred share. The maker of chemicals, plastics, agricultural products and advanced materials can only do so if its stock price is above $53.72 for 20 trading days in a 30-day period.
The Dow’s holdings have proven to be often unscheduled. Lehman Brothers collapsed two months later, sending credit markets into a tailspin, asset prices plummeting, and a shock wave in the housing market and the broader U.S. economy.
The chemical giant had planned to cover the bulk of the deal’s cost with a $9 billion joint venture with Kuwait Petrochemical Industries. However, the state-run company ended the partnership in December 2008, sending the Dow stock plummeting.
“The world is falling apart,” Buffett. He told CNBC. In the year Recalling that in 2017, Dow tried to contact Rohm & Haas and was unable to get back. “In April 2009, we closed the deal to buy the stock, at which point the market completely fell apart.”
Buffett found himself paying 60 cents on the dollar in light of the Dow’s falling stock and weakened prospects.
“We got $3 billion of something that was worth about $1.8 billion at the time,” Buffett said. “One of the reasons people give us offers – they know we’re going to close.”
Of course, Buffett made deals not only with Dow Goldman Sachs, General Electric, MarsBetween 2008 and 2009, Swiss Re deployed a total of $21.1 billion and had positions worth $26 billion at the end of 2009, earning $2.1 billion in dividends and interest each year.
But the cash-savvy investor sold shares in companies such as Moody’s, Procter & Gamble and Johnson & Johnson to finance the deal and avoid depleting Berkshire’s cash reserves, which fell below $20 billion in April 2009. Exciting opportunities emerging.
“All that time, we had these commitments and that prevented me from doing some of the things that we could have done at that time — that’s our $3 billion exit,” he told CNBC, referring to Berkshire’s investment. dau
As for the Dow, Buffett’s cash and confidence vote helped quell fears on Wall Street that the company might bite off more than it can chew and fall into bankruptcy.
At the time, Hasan Ahmed, an analyst at WorldBik Global Advisors, said, “The case was taken at a time when the Dow was very desperate.” he told Reuters. In 2010
Buffett may have felt he overpaid, but the deal was still lucrative.
“Those preferred shares are making a lot of money,” Ahmen said. “Financially, I’d like to get him out.”
The Dow has paid Buffett a hefty dividend for more than seven years. In December 2016, he finally freed himself from the costly commitment by converting Berkshire’s preferred shares into 72.6 million common shares.
Buffett and his team had no interest in owning Dow’s common stock, so they sold all the shares they were ready to receive in advance. The Dow redeemed the stock on December 30, and Berkshire exited the position entirely by the end of the next day.
Buffett told CNBC that he made about $1 billion in profit selling Berkshire Dow stock. The company has collected more than $1.8 billion in total dividends from preferred stock. As a result, Buffett made a pretax return of about $3 billion, or more than double what he invested.
Then-Dow CEO Andrew Livers tipped his hat to Buffett.
“He did very well with that investment, as he did at Goldman and elsewhere,” he told Reuters. “It was incredibly helpful in times of crisis.”
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