New York: Tycoon Warren Buffett’s Berkshire Hathaway has agreed to buy $5 billion of stock in Goldman Sachs, and could double its stake within five years, the Wall Street bank said late on Tuesday.
Under the terms of the agreement, Berkshire Hathaway is buying $5 billion of perpetual preferred stock bearing a 10% annual interest rate, Goldman Sachs Group said in a statement.
Buffett, through his holding company, will have the option of buying $5 billion of common stock priced at $115 a share “at any time for a five-year term,” the company said.
Goldman Sachs, until Monday one of the last two major Wall Street investment banks, with Morgan Stanley, said it plans to raise “at least” $2.5 billion in common equity in a public offering.
Goldman Sachs said it had struck the deal with Berkshire Hathaway “in a private offering.”
“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects,” Lloyd Blankfein, Goldman chairman and chief executive, said in the statement.
In electronic trading after the stock market closed, Goldman Sachs shares leapt 8.12 % to $135.20.
“Goldman Sachs is an exceptional institution,” Buffett, chairman and CEO of Berkshire Hathaway, said in the statement.
Monday, the Federal Reserve approved applications from Goldman Sachs and its Wall Street investment bank rival Morgan Stanley to become bank holding companies, effective immediately, amid a worsening financial crisis.
The conversion of Goldman Sachs and Morgan Stanley to regulated commercial banks marked the end of an era of independent Wall Street investment firms and a separation in the industry since the 1930s.
The change closed the door on the last two major Wall Street firms as independent, largely unregulated entities.
The investment banks began falling with the demise of Bear Stearns in March, which had to be rescued by JPMorgan Chase at a bargain-basement price from a death spiral because of its massive losses from a real-estate meltdown.
Earlier this month, investment bank Lehman Brothers filed for bankruptcy when it failed to find a partner or government aid, and rival Merrill Lynch was forced into a marriage with Bank of America.
Goldman and Morgan Stanley had been the last two major independent Wall Street banks, but had been under intense pressure to find merger partners in the face of financial market storm on fears of further collapses in the sector.