Video: Warren Buffett talks GE, bailout bill

updated 10/1/2008 8:11:22 PM ET 2008-10-02T00:11:22

Warren Buffett’s Berkshire Hathaway Inc. is investing $3 billion in General Electric Co., 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’s company invested $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 2008. The company, which makes everything from light bulbs to jet engines and owns NBC Universal, 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 unit.

The stock has fallen 42 percent in the past year.

Buffett, after announcing his investment on Wednesday, praised Fairfield, Conn.-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.”

(Msnbc.com is a joint venture of Microsoft and NBC Universal. The latter is a subsidiary of GE.)

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,” said analyst Mike McGarr of Becker Capital in Portland, Ore. “It’s a nice endorsement. He doesn’t make too many mistakes.”

Berkshire, based in Omaha, Neb., 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. GE’s shares closed at $24.50 Wednesday.

The company also said it 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.”

The stock sold to the public and Buffett totals $15 billion in value, enhancing GE’s flexibility and giving the company “the opportunity to play offense in this market should conditions allow,” GE CEO Jeff Immelt said in a statement.

Shares of GE fell by more than 10 percent earlier Wednesday after a Deutsche Bank analyst cut his 2008 and 2008 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 $19.5 billion and $21 billion.

And 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 Wednesday afternoon.

Investment fund manager Whitney Tilson, who founded T2 Partners LLC, said Berkshire is one of the few large, rapid sources of capital in the world currently.

“Companies are willing to accept his capital on better terms than capital from anyone else because of the market psychology of having Warren Buffett investing in their company,” Tilson said.

Buffett has built Berkshire and its investment portfolio by buying proven, well-regarded companies that have fallen out of favor with most investors. Berkshire’s investment portfolio reads like a who’s who of American business, with sizable stakes in companies such as American Express Co., Coca-Cola Co., Kraft Foods and Wrigley gum.

“I think he’s just sticking with quality and getting a better deal than anybody else can get,” said Andy Kilpatrick, the stockbroker-author who wrote “Of Permanent Value: The Story of Warren Buffett.”

Analyst Joel Levington, director of corporate credit at Hyperion Brookfield Asset Management Inc. in New York, said GE did not have to strike the deal with Buffett but will benefit from it.

“Having the stamp of approval from Warren Buffett is great to have in your back pocket,” he said. “You’re still talking about a company that should generate $20 billion in earnings. ... Your ability to comfort your shareholders and bondholders is important, but it comes at a cost.”

The Associated Press and Reuters contributed to this report.

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