By Peter Bergman (MoneyAmped.com)
- During the pinnacle of the financial crisis, Warren Buffett made a significant investment of $3 billion in Dow Chemical.
- Berkshire Hathaway, in exchange, was granted preferred stock that yields an annual dividend rate of 8.5%.
- The company, under the leadership of Mr. Buffett, reportedly generated an approximate profit of $3 billion through the strategic execution of stock sales and the accrual of dividends.
During the financial crisis, Warren Buffett made a substantial investment of $3 billion into Dow Chemical. This infusion of capital was crucial in facilitating the manufacturer’s acquisition when various stakeholders, such as investors, lenders, and companies, were adopting a cautious approach to mitigate risks.
An account detailing one of Warren Buffett’s notable transactions, wherein he extended crucial financial assistance to a struggling enterprise, yielding a substantial profit.
Chemistry of Money
In July 2008, Dow agreed to acquire Rohm and Haas for an approximate value of $19 billion, which includes the assumption of debt. Additionally, Dow sought the assistance of Berkshire Hathaway, led by Warren Buffett, to facilitate the financing of this transaction. The acquisition was undertaken as a strategic move by Dow to realign its business priorities, transitioning away from the production of bulk chemicals and redirecting its attention towards cultivating higher-margin specialty chemicals.
Warren Buffett, the esteemed investor, committed to allocate $3 billion in return for acquiring 3 million Series A convertible preferred shares. These shares, characterized by their convertible nature, offered a notable dividend rate of 8.5%, amounting to a substantial annual sum of $255 million. Preferred shares typically present a propensity for yielding higher dividend payments than ordinary shares, affording holders a superior position in dividend distribution priority.
The Dow Corporation could exercise the conversion privilege of Berkshire Hathaway’s preferred stock, commencing in April 2014. This conversion entailed a ratio of 24.201 common shares for every select share. The manufacturer of chemical compounds, synthetic polymers, agricultural science solutions, and cutting-edge materials would be eligible to proceed with its operations solely upon the condition that the valuation of its shares surpasses the threshold of $53.72 for a consecutive duration of 20 trading days within a 30-day timeframe.
Unfavorable Chain of Events
The timing of Dow’s takeover could have been more optimal. The collapse of Lehman Brothers, which occurred two months subsequent, resulted in the subsequent seizing of credit markets, a substantial decline in asset prices, and reverberating shockwaves that permeated the housing market and the broader United States economy.
The corporation mentioned above had initially strategized to allocate a substantial portion of the financial burden associated with the transaction by utilizing $9 billion derived from a collaborative enterprise with Petrochemical Industries of Kuwait. The partnership between the state-run company and Dow was terminated in December 2008, resulting in a significant decline in Dow’s stock value.
In 2017, Warren Buffett conveyed to CNBC that the global landscape was a significant disintegration. He recounted the events wherein Dow attempted to withdraw from its intended acquisition of Rohm and Haas but was unsuccessful. The stock purchase was finalized in April 2009, coinciding with significant market deterioration.
In light of the decline in Dow’s stock and its diminished future outlook, Mr. Buffett observed that he could acquire shares at a price that represented a significant discount to their intrinsic value, approximately 60 cents on the dollar, as he stated.
According to Buffett, an amount of $3 billion was allocated for an asset that, based on estimations, had a value of approximately $1.8 billion during that period. One reason for providing deals to our organization is predicated on the awareness that we shall remain present and available throughout the closing process.
Warren Buffett entered agreements with multiple companies, including Dow, Goldman Sachs, General Electric, Mars, and Swiss Re, from 2008 to 2009. A cumulative amount of $21.1 billion was allocated towards the five transactions above, resulting in the acquisition of positions valued at a collective $26 billion by the conclusion of 2009. These positions generated an annual return of $2.1 billion through dividends and interest.
The investor with a focus on financial prudence opted to divest from holdings in companies such as Moody’s, Procter & Gamble, and Johnson & Johnson to generate capital for the transactions and prevent the erosion of Berkshire’s monetary reserves, which fell below the $20 billion mark in April of 2009. Furthermore, the individual consciously abstained from capitalizing on specific alluring opportunities.
A series of commitments were undertaken throughout the specified duration, impeding the pursuit of alternative endeavors that could have been conducted during the said period. The impediment above can be attributed to the substantial outflow of $3 billion allocated towards Berkshire’s investment in Dow, as stated by the individual in question during their conversation with CNBC.
Regarding Dow, Warren Buffett’s financial support and vote of confidence played a significant role in alleviating concerns within the financial community that the company had potentially overextended itself and faced the risk of insolvency.
According to Hassan Ahmed, an analyst at Alembic Global Advisors in 2010, the stake acquisition occurred during significant desperation for Dow.
It is plausible that Mr. Buffett experienced a sense of overpayment on a substantial scale; however, it is essential to note that the negotiated transaction ultimately yielded a highly profitable outcome.
Getting Money
Dow has consistently disbursed substantial dividends to Mr. Buffett over seven years. In December 2016, Berkshire converted its preferred shares into 72.6 million common shares, thereby liberating itself from the financial burden of this commitment.
Buffett and his team needed more interest in retaining ownership of Dow’s common stock, leading them to proactively divest themselves of all the shares allocated to them in advance. The stock redemption by Dow occurred on December 30th, with Berkshire alleviating its entire position by the subsequent day’s conclusion.
According to statements made by Warren Buffett during an interview with CNBC, Berkshire Hathaway reportedly generated a profit of approximately $1 billion through the divestment of Dow stock. The organization has additionally accumulated a sum exceeding $1.8 billion in total dividends derived from its preferred stock. Consequently, Mr. Buffett achieved a pre-tax return of approximately $3 billion, representing a twofold increase relative to his initial investment.
The former Chief Executive Officer of Dow, Mr. Andrew Liveris, expressed his appreciation towards Mr. Buffett.
According to the source, the individual in question has exhibited commendable performance in managing said investment and in their previous endeavors at Goldman Sachs and other undisclosed locations, as reported by Reuters. The individual in question showed exceptional value and made significant contributions during the crisis.
