Buffett and Goldman: A 50-Year Relationship

By the looks of things this morning, stocks won't be hitting a new all-time high today, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.56% and 0.57%, respectively, at 10:10 a.m. EDT. Europe's major indexes are all down significantly today, particularly France's CAC-40 and Spain's IBEX 35, with losses exceeding 1.5%.

Buffett and Goldman: For the love of the deal
Berkshire Hathaway
(NYSE: BRK-B  ) CEO Warren Buffett and Goldman Sachs (NYSE: GS  ) have modified the terms of his warrants to buy Goldman shares such that Berkshire will likely become one of the bank's top 10 shareholders without putting up a single dollar.

Berkshire received warrants (which are simply long-dated options) to buy 43.5 million shares of Goldman at a "strike" price of $115 in 2008, when he flew to Goldman's rescue with a $5 billion preferred-share investment. The warrants expire on Oct. 1 of this year, and exercising them would require a $5 billion cash payment to Goldman. Instead, Berkshire will receive shares equal in value to the difference between the average closing price during the 10 days prior to Oct. 1 and the strike price of $115, multiplied by 43.5 million. Based on Monday's closing price, that would give Berkshire nearly a 2% stake.

In announcing the new terms, Buffett commented: "We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago. I have been privileged to have known and admired Goldman's executive leadership team since my first meeting with Sidney Weinberg in 1940."

1940? Buffett would have been 10 years old at the time -- how did he manage to meet the senior partner of the firm? It turns out that Howard Buffett, Warren's father, gave each of his children an East Coast trip when they were 10 years old. Warren had a clear agenda: He wanted to visit the Scott Stamp and Coin Company, the Lionel Train Company, and the New York Stock Exchange. On that 1940 trip, while they were in lower Manhattan, Howard Buffett took his son to visit Goldman Sachs. As Buffett recounted the event to his biographer Alice Schroeder:

That's when I met [Goldman senior partner] Sidney Weinberg, who was the most famous man on Wall Street. My dad had never met him. He had this little tiny firm out here in Omaha. But Mr Weinberg let us in, maybe because a little kid was along or something. We talked for about 30 minutes. As I went out, he put his arm around me and he said, 'What stock do you like, Warren?' He'd forgotten it all the next day, but I remembered it forever.

Buffett's relationship with Goldman is not built on sentiment, though. Over the years, Goldman's Byron Trott (who left the firm in 2009 to strike out on his own) became Buffett's go-to investment banker. As Buffett wrote in Berkshire's 2007 shareholder letter: "Byron is the rare investment banker who puts himself in his client's shoes. Charlie [Munger] and I trust him completely."

Trott came up with the idea of having Buffett invest in Goldman in 2008, and he brought some significant deals to Berkshire over the years, including its $1.5 billion acquisition of the MacLane company from Wal-Mart and its $4.5 billion purchase of Marmon Holdings from the Pritzker family.

Deal making and making money: The cornerstone of a happy and healthy 50-year relationship.

Thanks to Buffett's investment savvy, Berkshire Hathaway's book value per share has grown a mind-blowing 586,817% over the past 48 years. But with Buffett aging and Berkshire rapidly evolving, is this insurance conglomerate still a buy today? In The Motley Fool's premium report on the company, Berkshire expert Joe Magyer provides investors with key reasons to buy, as well as big risks to watch out for. Click here now for instant access to Joe's take on Berkshire!


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