Warren Buffett’s Berkshire Hathaway Inc is investing US$3 billion in General Electric Co (GE), a huge vote of confidence for an iconic US company battered by the financial crisis.
For the second time in just over a week, Berkshire Hathaway has moved to shore up a company long known for its ironclad fiscal health. Buffett’s company invested US$5 billion in Goldman Sachs last week after the famed investment bank’s shares had slumped. Investors feared Goldman could face similar funding squeezes as Bear Stearns and Lehman Brothers.
For GE, the cash infusion marks another dramatic turn in a turbulent year. The company, which makes everything from light bulbs to jet engines and owns NBC Universal, has cut its earnings forecast twice since April because of problems at its financing unit, GE Capital. It has also announced a reorganization and unveiled plans to spin off or sell its famed appliances unit.
The stock has fallen 42 percent in the past year.
Buffett, after announcing his investment on Wednesday, praised Fairfield, Conneticut-based General Electric.
“GE is the symbol of American business to the world,” he said in a statement. “They have strong global brands and businesses ... I am confident that GE will continue to be successful in the years to come.”
Analysts said Buffett’s endorsement would mean as much or even more than Berkshire’s cash.
“He’s a smart guy and he wouldn’t get involved if he doesn’t think it’s a great company,” said analyst Mike McGarr of Becker Capital in Portland, Oregon. “It’s a nice endorsement. He doesn’t make too many mistakes.”
Berkshire, based in Omaha, Nebraska, is buying US$3 billion in preferred shares in 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 US$3 billion in GE common stock for US$22.25 each at any time over the next five years. GE’s shares closed at US$24.50 on Wednesday.
The company also said it plans to sell at least US$12 billion in common stock to the public.
Like the Goldman Sachs deal, both sides will benefit, Morningstar analyst Justin Fuller said.
“I think they’re kind of a win-win situation — great deals for Berkshire and good deals for the other companies,” Fuller said. “I think in a lot of ways, Goldman, and certainly GE, they’re in effect buying Buffett’s backing.”
The stock sold to the public and Buffett totals US$15 billion in value, enhancing GE’s flexibility and giving the company “the opportunity to play offense in this market should conditions allow,” GE chief executive Jeff Immelt said in a statement.
Shares of GE fell by more than 10 percent earlier on Wednesday after a Deutsche Bank analyst cut his earnings forecasts for GE, citing a bleak outlook for the financing unit. The stock pared its losses on the Berkshire news, closing down 3.9 percent.
Last week, GE warned the unit would hurt overall earnings, lowering them about 10 percent, to between US$19.5 billion and US$21 billion.
In April, GE stunned Wall Street by reporting a 6 percent drop in first-quarter earnings, widely missing its own forecast.
Buffett’s spokeswoman did not immediately respond to a message left on Wednesday afternoon.