How Warren Buffett Amassed 10 Million Shares of General Electric Company

When Warren Buffett loads up on shares of a company, it's a big deal. His long-term track record of outperformance speaks for itself. Further, his research is so thorough, he claims a five-year market closure wouldn't shake his investing confidence one bit.

As a result, the news that Buffett's holding company, Berkshire Hathaway (NYSE: BRK-B  ) , acquired 10 million shares of General Electric (NYSE: GE  ) caught the eye of several financial media outlets over the weekend.

When revealed in Berkshire's 13-F filing, the $300 million stake took some investors by surprise. Is Buffett really this impressed by GE? Well, as is usually the case, the devil's in the details.

Berkshire holds roughly 10.6 million shares in General Electric as of Dec. 31, 2013, which amounts to nearly 18 times the size of Berkshire's stake in the company as of Sept. 30 of last year. That's a hefty increase, even if it is chump change relative to Berkshire's $400 billion in assets.

  As of Sept. 30, 2013 As of Dec. 31, 2013
Berkshire's GE common stock $14.06 million  588,900 shares $296.71 million 10,585,502 shares

At a glance, it's quite clear that Berkshire's holding expanded significantly, but the Oracle of Omaha didn't just accumulate shares of "the General" during a 2013 holiday shopping spree. Instead, Berkshire amassed stock in the industrial conglomerate through the exercise of a five-year-old warrant in October. Berkshire's current stake in GE, then, is a relic of the Oracle's decision to backstop the industrial conglomerate during the height of the credit crisis. 

That decision dates back to 2008, when Berkshire stepped in and acquired $3 billion to aid an ailing General Electric. Despite GE's troublesome banking unit, Buffett endorsed the manufacturer as "the symbol" of American business at a precarious moment in the company's life.

Ultimately, GE weathered the storm, and a half-decade later, the Oracle exited the position when Berkshire opted for a "net share settlement." The settlement, properly exercised, resulted in the accumulation of approximately $260 million in shares. Considering the $3 billion investment, it was a relatively small payday for Buffett, especially compared to similar warrants redeemed with Goldman Sachs and Bank of America.

Nevertheless, a month and a half after redeeming the warrants, the shares of General Electric remained on Berkshire's books, which is why the increased holding caught the attention of the financial press last week. Buffett, as the chairman CEO of Berkshire, could have opted to sell the General Electric shares immediately at a profit, but some outlets have speculated that the Oracle is impressed with GE's current portfolio of businesses. Whether Berkshire's in this for the long haul is up for debate. Interestingly, however, the revelation comes on the heels of insider buying at GE, including a purchase by CEO Jeff Immelt in January.

Foolish takeaway
For long-term Foolish investors, evaluating Berkshire's 13-F can reveal juicy nuggets about Buffett's latest transactions and his overall market or industry sentiment. But understanding Buffett's stance on General Electric is not so cut and dry.

On one hand, GE resembles a classic Buffett stock, as my colleague Patrick Morris points out quite convincingly. On the other, if Buffett wanted a huge stake in General Electric, he could just as easily have bypassed the net share settlement and held onto a $3 billion-plus position. Unless Berkshire decides to snatch up shares in the near future, we can't be convinced of Buffett's perception of the company one way or another. From my perspective, Buffett's holding today is the product of a special situation, a unique position reserved just for the Oracle.

Engineers evaluate a GE pipeline product. Source: General Electric. 

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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 19, 2014, at 2:00 PM, pondee619 wrote:

    "How Warren Buffett Amassed 10 Million Shares of General Electric Company"

    http://www.nbcnews.com/id/26976416/ns/business-us_business/t...

    "Berkshire, based in Omaha, Neb., is buying $3 billion of preferred shares of GE, which carry a 10 percent dividend. The terms are similar to those Buffett struck with Goldman Sachs. Berkshire also has the option to buy $3 billion worth of GE common shares for $22.25 each at any time over five years. GE’s shares closed at $24.50 Wednesday"

    "How Warren Buffett Amassed 10 Million Shares of General Electric Company"? He bought #3billion of preferred shares of GE paying a 10% dividend that came along with warrants to buy $3 billion of common GE stock @ 22.25 (about 135 million shares). The real questions are:

    Why did Berkshire only exercise its option to the tune of 10 Million shares and not the full 135 Million?

    What did Berkshire so with the remainder of its un-exercised warrants?

    Does Berkshire still own the $3 billion in preferreds?

  • Report this Comment On February 19, 2014, at 6:00 PM, dgmennie wrote:

    "(Buffett) claims a five-year market closure wouldn't shake his investing confidence one bit."

    Of course not. He's 80+ years old and a multibillionaire. He could not even squander or give away this tub of cash in the time he has left.

    I want to hear about how a relatively ordinary someone gets rich by the time they are 40 or 50 years old using a reliable, simple method that works 99% of the time.

    Those with more billions than they know what to do with are on a part of the income

    'Bell Curve' that mere mortals need not worry themselves about.

  • Report this Comment On February 19, 2014, at 6:23 PM, suziathome wrote:

    If you look at Buffett's life story, he is a relatively ordinary someone who used a reliable simple method that works 99% of the time - holding on to your stock for the long term - Motley Fool principle #1.

  • Report this Comment On February 19, 2014, at 6:51 PM, TMFBoomer wrote:

    @pondee619

    My understanding is that Berkshire does not own the preferred shares today. Those were redeemed and Berkshire collected the proceeds from the 10% annual dividend.

    http://blogs.wsj.com/deals/2011/09/13/warren-buffett-made-at...

    The preferred stock, however, came with a warrant to purchase $135 million worth of GE common at $22.25. Instead of purchasing that full allotment, however, Berkshire engaged in a “net share settlement”. So, in October of 2013, Berkshire accumulated the number of shares of GE common stock to compensate for the difference in GE’s price at the time and the exercise price of $22.25. That 'net' amount came out to roughly 10 million shares as discussed in the article, which Berkshire (Buffett) holds as of Dec 31st.

    Hopefully that answers your questions. Let me know if you see any issues with my analysis.

    Isaac

    @TMFBoomer

  • Report this Comment On February 22, 2014, at 3:06 PM, cmalek wrote:

    @suziathome:

    Motley Fool principle #1 is for fools (small f). If you hold on to your stocks long term, you only gain on paper. To realize those gains you must buy AND sell, which contradicts Principle #1. The dividends from your buy-and-hold stocks are not going to make you rich, especially if you re-invest them. For example, you would have to own over 27,000 shares of AT&T stock (5%+ yield) to generate about $50,000/yr which would not provide you with a comfortable standard of living by any stretch of the imagination. Warren Buffet did not get to own Berkshire by buying and holding on to his stocks. He traded.

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