Warren Buffett often compares his search for good investments to hunting for elephants. Following Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) massive acquisition of Burlington Northern Santa Fe in 2010, he noted that "Our elephant gun has been reloaded, and my trigger finger is itchy." And after this year's purchase of H.J. Heinz, he reiterated the sentiment in an interview on CNBC. "I'm ready for another elephant. Please, if you see any walking by, just call me."
As it turns out, no hunting will be necessary -- at least for today. Thanks to Buffett's adroit maneuvering during the depths of the financial crisis, one just laid down right in front of him.
The proverbial trap was set in Sept. 2008. In exchange for a $5 billion investment in preferred shares of Goldman Sachs (NYSE:GS), the investment bank gave Berkshire the right to purchase 43.5 million shares of its common stock at an exercise price of $115. We learned today, in turn, that Goldman will satisfy its obligation by delivering to Berkshire a commensurate amount of common stock. At today's price, according to Forbes magazine, that would make it the 13th largest holder of the Goldman's common stock.
As Buffett noted in the jointly issued press release, "We intend to hold a significant investment in Goldman Sachs, a firm that I did my first transaction with more than 50 years ago."
But what about Bank of America?
At this point, you may be wondering what this has to do with Bank of America (NYSE:BAC) -- and the dismal performance of its stock price today in particular. The answer is both nothing and everything. On the one hand, a transaction between Berkshire and Goldman should theoretically have no bearing whatsoever on Bank of America's shares. But on the other hand, it serves as a reminder of the potentially dilutive impact of a similar agreement Berkshire inked with Bank of America.
In the middle of 2011, Berkshire took a page out of its own playbook and invested $5 billion in Bank of America's preferred stock yielding 6%. Buffett noted at the time that "Bank of America is a strong, well-led company, and I called [CEO Brian Moynihan] to tell him I wanted to invest in it." Buffett went on to say that "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."
Beyond the preferred stake, and similar to his deal with Goldman, Berkshire also received warrants to buy 700 million shares of Bank of America's common stock at $7.14 apiece. At today's price, that equates to a nearly $3.6 billion gain. But while this was all well and good at the time, as news of the deal buoyed the bank's share price, the problem is that it will soon be time to pay the piper. And in this case, that potentially means issuing 700 million new shares at the agreed-upon price.
To be fair, investors in the nation's second largest bank by assets aren't strangers to dilution. As I discussed here, its outstanding share count almost doubled between 2009 and today, going from 6.4 billion to 10.8 billion, respectively. But that doesn't make the medicine go down any easier. Earlier this month, investors learned that Bank of America had been given approval by the Federal Reserve to repurchase $5 billion in common stock. News of the deal sent the bank's shares soaring. In the light of today's reminder, however, that reaction appears overdone, as much of the buyback program will be offset by the eventual satisfaction of Berkshire's contractual rights.