General Electric
Company Overview
General Electric was once the most admired conglomerate in American business history and one of the most valuable companies in the world. Berkshire's investment in GE reflects the same crisis-capital pattern as Goldman Sachs: providing strategic preferred stock financing during the 2008 financial crisis at terms unavailable to passive investors.
Investment Story
2008: $3 billion crisis investment. In October 2008, three weeks after the Lehman Brothers bankruptcy, Berkshire invested $3 billion in GE preferred stock at 10% annual dividend plus warrants to purchase $3 billion of GE common stock at $22.25 per share. Like the Goldman deal, the investment provided both financial capital and a confidence signal: if Buffett trusted GE enough to invest $3 billion, perhaps GE's situation was less dire than markets feared.
The terms and exit. GE redeemed the preferred stock in 2011 at a 10% premium ($3.3 billion). Berkshire exercised the warrants for a profit of approximately $800 million. Total return on the $3 billion crisis investment: roughly $1.6 billion including dividends, a 53% return over approximately three years.
GE's subsequent decline. While Berkshire profited from its crisis investment, GE itself proved to be in far deeper structural trouble than the 2008 crisis revealed. Under CEO Jeff Immelt, GE Capital — the financial services arm — had grown to represent nearly half of GE's earnings, creating enormous leverage risk. GE's subsequent decade involved multiple write-downs, dividend eliminations, and sale of business units that reduced a $500 billion company to approximately $100 billion in market value.
Buffett's Own Words
Ford or General Electric. The less these companies are being valued at, says this approach, the more vigorously they should be sold. As a "logical" corollary, the approach commands the institutions to repurchase these companies - I'm not making this up - once their prices have rebounded significantly. Considering that huge sums are controlled by managers following such Alice-in-Wonderland practices, is it any surprise that markets sometimes behave in aberrational fashion? Many commentators, however, have dr
To date, the results aren’t encouraging. A few CEOs, such as Jeff Immelt of General Electric, have led the way in initiating programs that are fair to managers and shareholders alike. Generally, however, his example has been more admired than followed. It’s understandable how pay got out of hand. When management hires employees, or when companies bargain with a vendor, the intensity of interest is equal on both sides of the table. One party’s gain is the other party’s loss, and the money involved has real meani
To date, the results aren’t encouraging. A few CEOs, such as Jeff Immelt of General Electric, have led the way in initiating programs that are fair to managers and shareholders alike. Generally, however, his example has been more admired than followed. It’s understandable how pay got out of hand. When management hires employees, or when companies bargain with a vendor, the intensity of interest is equal on both sides of the table. One party’s gain is the other party’s loss, and the money involved has real meani
Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and mysel
In addition, we own positions in non-traded securities of Dow Chemical, General Electric, Goldman Sachs, Swiss Re and Wrigley with an aggregate cost of $21.1 billion and a carrying value of $26.0 billion. We purchased these five positions in the last 18 months. Setting aside the significant equity potential they provide us, these holdings deliver us an aggregate of $2.1 billion annually in dividends and interest. Finally, we owned 76,777,029 shares (22.5%) of BNSF at yearend, which we then carried at $85.78 per sha
Investment Lessons
Crisis investments can succeed even when the underlying business subsequently deteriorates. Berkshire's GE investment was structurally protected: the preferred stock provided repayment priority over common equity holders, and the 10% premium on redemption compensated for the risk taken. Berkshire made excellent returns despite GE's long-term decline as a corporation because the investment's structure (preferred, not common) provided protection that common shareholders lacked.
Conglomerate complexity hides risk. GE's enormous financial services subsidiary created risks that were not visible in the industrial conglomerate narrative that management projected. The massive leverage embedded in GE Capital, the exposure to real estate and structured credit, and the accounting complexity that resulted were all manageable during normal credit conditions but catastrophic in the 2008-09 crisis. This experience reinforces Buffett's preference for simple business models where intrinsic value estimation is possible.