BILLIONAIRE BUSINESSMAN Warren Buffett has taken a $3 billion stake in industrial conglomerate GE, a cash injection that came barely a week after his $5 billion investment in Goldman Sachs.
GE will follow the investment by Mr Buffett's company Berkshire Hathaway with a $12 billion share offering, bringing to $15 billion the funds it is raising in an effort to boost its balance sheet after a 39 per cent drop in its share price this year.
The company made public Mr Buffett's investment not long after it sought to eradicate speculation about the impact of tight money markets on its funding situation by saying it continued to be able to sell commercial paper.
In the face of a big rise in the price of its credit default swaps, GE said it saw no reason for the increase. "Despite current market disruptions, our CP [commercial paper] funding has gone smoothly. We have over-funded every day, including today, with good demand for our paper in term maturities."
After dropping as much as 9 per cent early yesterday, GE's stock was priced 4.35 per cent weaker at $24.39 a couple of hours after Mr Buffett's investment was made public.
His support for the company follows a reduced profit forecast from the company last week, GE's second this year, in which it cited turmoil in the financial markets. "GE is the symbol of American business to the world," Mr Buffett said in a statement. "I have been a friend and admirer of GE and its leaders for decades."
GE chief Jeff Immelt said the fundraising did two things for investors in the company. "First, it enhances our flexibility and allows us to execute on our liquidity plan even faster. Second, it gives us the opportunity to play offense in this market should conditions allow," he said.
Mr Buffett's investment comes at a price, however. Having extracted tough terms from Goldman Sachs last week, he is acquiring perpetual shares in GE which pay a dividend of 10 per cent and are callable after three years at a 10 per cent premium.
As with his Goldman investment, he will also receive warrants to increase his stake in the business. The warrants allow him to inject $3 billion into the company for five years by buying common stock at a strike price of $22.25 per share. This strike price represents a 12.75 per cent discount to GE's closing price on Tuesday.
With the Bush administration repeatedly warning that the bailout package was required to stop the credit crunch compromising industrial companies from funding their regular operations, the increase in GE's price of credit default swaps indicates that investors are worried about the spillover effect of the crisis.
The statement the company made before making public Mr Buffett's investment came after the price of insuring against a default by the company rose by 20 per cent at one point yesterday. Such an increase implies a drop in investor confidence.
Weak labour market data suggests that the turmoil in financial markets continues to weaken the economy large.
Following the refusal of the US House of Representatives to endorse the bailout, the interbank cost of borrowing rose again. The London interbank offered rate (Libor) one-month euro borrowing rose to a record 5.07 per cent yesterday, although the overnight rate dropped after a funding squeeze linked to the end of the third quarter eased.
Meanwhile, the Securities and Exchange Commission issued guidance emphasising the flexibility companies have to depart from mark-to-market in situations when markets are illiquid.
