Warren Buffett poured $3 billion into Dow Chemical during the financial crisis. Here’s the story of how he helped the manufacturing titan – and doubled his money.

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Warren Buffett.Drew Angerer/Getty Pictures

  • Warren Buffett invested a significant $3 billion in Dow Chemical on the peak of the monetary disaster.

  • In return, Berkshire Hathaway obtained most popular inventory paying a yearly dividend of 8.5%.

  • Buffett’s firm in the end made an estimated $3 billion revenue from inventory gross sales and dividends.

Warren Buffett poured $3 billion into Dow Chemical within the depths of the monetary disaster, serving to the producer to finish an acquisition at a time when traders, lenders, and corporations had been taking cowl.

Here is the story of one among Buffett’s signature offers, which supplied much-needed money to an ailing firm – and earned him a wholesome return.

Monetary chemistry

Dow agreed to purchase Rohm and Haas for practically $19 billion together with debt in July 2008, and roped in Warren Buffett’s Berkshire Hathaway to assist with the financing. The acquisition was a part of Dow’s technique to shift its focus away from bulk chemical substances towards higher-margin, specialty chemical substances.

Buffett agreed to place up $3 billion in alternate for 3 million Collection A convertible most popular shares, which paid an 8.5% dividend, or $255 million a 12 months. Most well-liked shares usually supply bigger dividends than frequent shares, and holders take precedence relating to dividend payouts.

Dow had the choice to transform some or all of Berkshire’s most popular inventory into frequent inventory beginning in April 2014, at a ratio of 24.201 frequent shares for every most popular share. The maker of chemical substances, plastics, agroscience merchandise, and superior supplies may solely achieve this if its inventory value exceeded $53.72 for 20 buying and selling days in a 30-day interval.

Hostile response

Dow’s takeover proved to be poorly timed. Lehman Brothers collapsed two months later, inflicting credit score markets to grab up, asset costs to plunge, and shockwaves to reverberate by way of the housing market and the broader US economic system.

The chemical substances large had deliberate to cowl a giant chunk of the deal’s price utilizing $9 billion of proceeds from a three way partnership with Kuwait’s Petrochemical Industries. Nonetheless, the state-run firm scrapped the partnership in December 2008, sending Dow inventory plunging.

“The world fell aside,” Buffett advised CNBC in 2017, recalling that Dow tried and did not again out of buying Rohm and Haas. “We closed the deal to purchase the inventory in April 2009, by which era the market had completely disintegrated.”

Given the collapse in Dow’s inventory and its weakened prospects, Buffett discovered himself paying the equal of a greenback for 60 cents, he stated.

“We confirmed up with $3 billion for one thing that was value about $1.8 billion perhaps on the time,” Buffett famous. “Which is one motive folks supply us offers – they know we’ll be round on the closing.”

Certainly, Buffett struck agreements with not solely Dow but additionally Goldman Sachs, Normal Electrical, Mars, and Swiss Re between 2008 and 2009. He deployed a complete of $21.1 billion throughout these 5 transactions, securing positions value a mixed $26 billion on the finish of 2009, which had been yielding $2.1 billion in dividends and curiosity yearly.

Nonetheless, the cash-conscious investor offered shares of firms like Moody’s, Procter & Gamble, and Johnson & Johnson to fund the offers and keep away from depleting Berkshire’s money reserves, which dropped beneath $20 billion in April 2009. He additionally kept away from capitalizing on among the attractive alternatives that popped up.

“Throughout that entire interval, we had these commitments and that saved me from doing another issues we would have carried out at the moment — the truth that we had this $3 billion going out the door,” he advised CNBC, referring to Berkshire’s funding in Dow.

As for Dow, Buffett’s cash and vote of confidence helped to assuage concern on Wall Road that the corporate had bitten off greater than it may chew and may tumble into insolvency.

“The stake was taken at a time when Dow was actually determined,” Hassan Ahmed, an analyst at Alembic International Advisors on the time, advised Reuters in 2010.

Buffett might have felt he massively overpaid, however the deal he negotiated was nonetheless profitable.

“These most popular shares are yielding quite a bit,” Ahmen stated. “Purely on a monetary foundation, I would prefer to knock him out.”

Producing revenue

Dow paid supersized dividends to Buffett for greater than seven years. In December 2016, it lastly transformed Berkshire’s most popular shares into 72.6 million frequent shares, liberating itself from the pricey dedication.

Buffett and his group had little interest in proudly owning Dow’s frequent inventory, so that they offered the entire shares they had been set to obtain forward of time. Dow redeemed the inventory on December 30, and Berkshire was out of the place completely by the top of the following day.

Berkshire made a couple of $1 billion revenue from promoting the Dow inventory, Buffett advised CNBC. The corporate additionally collected over $1.8 billion in complete dividends from its most popular inventory. Because of this, Buffett made a couple of $3 billion pre-tax return, or roughly double what he invested.

Dow’s then-CEO, Andrew Liveris, tipped his hat to Buffett.

“He is carried out very properly with that funding, as he has carried out at Goldman and elsewhere,” he advised Reuters. “He was extremely beneficial by way of the disaster.”

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