/ OMAHA, Neb. — Warren Buffett's Berkshire Hathaway is investing $3 billion in General Electric, a huge vote of confidence for an...
OMAHA, Neb. — Warren Buffett’s Berkshire Hathaway is investing $3 billion in General Electric, a huge vote of confidence for an iconic American 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 bought a $5 billion stake 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 2008. The company, maker of everything from light bulbs to jet engines and owner NBC television, has cut its earnings forecast twice since April due to problems with its financing unit, GE Capital. It has also announced a reorganization and unveiled plans to spin off or sell its famed appliances.
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The stock has fallen 42 percent in the past year.
Buffett, after announcing his investment on Wednesday, praised GE.
“GE is the symbol of American business to the world,” Berkshire Hathaway Chairman and CEO Warren Buffett said “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 will 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. It’s a nice endorsement. He doesn’t make too many mistakes,” said analyst Mike McGarr of Becker Capital in Portland.
Buffett has been vocal about the battered economy, describing the fall of Lehman Brothers, the sale of Merrill Lynch and the U.S. seizure of insurance giant AIG two weeks ago as “an economic Pearl Harbor.”
He called the U.S. economy in “terrible, terrible, terrible shape” during an early Wednesday interview on financial-cable channel CNBC. Later Wednesday, he described the economy as “flat on the floor” after a cardiac arrest as companies struggle to secure funding and unemployment increases.
“In my adult lifetime I don’t think I’ve ever seen people as fearful, economically, as they are now,” Buffett said Wednesday on PBS’ “The Charlie Rose Show.” “The economy is going to be getting worse for a while.”
Berkshire is buying $3 billion of preferred shares of 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 $3 billion worth of GE common shares for $22.25 each at any time over five years. That was below GE’s closing share price of $24.50 on Thursday.
GE also plans to sell at least $12 billion worth of common stock to the public.
Like the Goldman Sachs deal, both sides will benefit, said Morningstar analyst Justin Fuller.
“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.”
Shares of GE fell by nearly 10 percent earlier Wednesday after a negative analyst note. But the stock pared its losses on the Berkshire news, closing down $1, or 3.9 percent. Berkshire Class A shares closed up $6,400, or 4.9 percent, at $137,000.
In a note to investors late Tuesday, analyst Nigel Coe of Deutsche Bank cut his 2008 and 2008 GE earnings forecasts, citing a bleak outlook for the conglomerate’s finance business, GE Capital.
GE’s share value has fallen during the financial crisis on Wall Street over the last several weeks. Last week, GE warned GE Capital would hurt overall earnings, lowering them about 10 percent, to between $19.5 billion and $21 billion, or $1.95 to $2.10 per share.
And in April, GE stunned Wall Street by reporting a 6-percent drop in first-quarter earnings, widely missing its own forecast.
Material from Bloomberg News was used in this report.