Buffett's Reputation Is for Sale

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And his sterling reputation doesn't come cheap.

Witness Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) newly announced 3-billion-Swiss-franc investment in troubled re-insurer Swiss Re: It's on the same sort of extraordinary terms that have been the hallmark of the string of transactions he has made in this crisis.

Buffett brings three things to the table: deep pockets, the ability to ink a deal very quickly, and his reputation as an extremely savvy investor. All three make him the partner of choice for companies that have a temporary need for capital and wish to restore investor confidence.

The reputational premium
In these trying times, confidence is a commodity that commands a very hefty liquidity and reputational premium. Just take a look at the terms Buffett got on these "crisis deals" in 2008 and 2009:



Equity kicker

Swiss Re

3 billion SFr ($2.6 billion) in perpetual convertible notes paying 12% interest

The notes can be converted into Swiss Re shares at SFr 25 in three years' time.

Harley-Davidson (NYSE: HOG  )

$300 million in senior unsecured debt paying 15% interest


General Electric (NYSE: GE  )

$3 billion in preferred shares paying a 10% dividend

Berkshire also receives warrants to purchase GE shares at a strike price of $22.25.

Goldman Sachs (NYSE: GS  )

$5 billion in preferred shares paying a 10% dividend

Berkshire also receives warrants to purchase Goldman shares at a strike price of $115.

Wm. Wrigley Jr. Company acquisition by Mars

$4.4 billion in subordinated debt

Berkshire simultaneously committed to buy a minority equity interest for $2.1 billion in the Wrigley Company subsidiary.

The weighted average yield on $10.9 billion invested (excluding the Wrigley investment -- as far as I can tell, the terms aren’t public): 10.6%. This figure is likely to understate the average annualized return that Berkshire will ultimately earn on these investments since it doesn't account for potential gains from exercising equity warrants or the conversion option on the Swiss Re notes.

How an elephant runs faster than the market
Even if you believe the S&P 500 is fairly valued at current levels (I don't -- I think it remains slightly overvalued), I think it's unlikely that the market will generate a better return over the next three to five years … much less the next three to five decades. Buffett is getting paid more than the historical average stock market return to invest in a basket of securities that are senior to the common shares of some of the best-run, most profitable companies in the world. That's a pretty remarkable feat -- one that is only possible through the position and reputation he has built for himself and Berkshire.

Buffett is well aware that, given the increasing amounts of cash he needs to re-invest, it is going to become increasingly difficult to beat the market (even with shareholdings in superlative businesses such as Procter & Gamble (NYSE: PG  ) or Costco (Nasdaq: COST  ) ). He has been very candid about this with Berkshire shareholders. However, he maintains for himself (and for those who will succeed him) the objective of achieving several percentage points of outperformance. These recent transactions are a blueprint for one way he can do this: charging temporarily distressed companies a heavy price to take his money and bask in his glow.

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Alex Dumortier, CFA has no beneficial interest in any of the other companies mentioned in this article. Costco Wholesale and Berkshire Hathaway are Motley Fool Inside Value picks. Costco Wholesale and Berkshire Hathaway are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2009, at 12:25 PM, bukaka wrote:

    Mr. Buffet must not know that Harley is outdated, over inflated, junk!?

    He should maybe invest in a tool company, because they need to give all Harley owners a new tool set!

    Dude, you need to hire me! I can fix this!

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