Rumors have been swirling over the previous two days that Berkshire Hathaway may be in negotiations with General Electric that could result in the investment firm making a multi-billion dollar investment in the industrial conglomerate. News has sent shares of General Electric up from a recent low of $12.80 to close at $13.68 today, an increase of 6.9%. That has put little salve on the wounds of longtime GE shareholders, whose investment traded for more than $30 per share as recently as late 2016.
Berkshire has invested in distressed situations before, almost always structuring such deals as a purchase of preferred stock along with warrants in common equity. During the financial crisis, Berkshire made investments in Goldman Sachs, General Electric, and Dow Chemical under a similar structure as well as Bank of America in 2011. Those investments have all worked out well for Berkshire Hathaway.
The prior investment in General Electric came about when the company’s finances were endangered when commercial paper markets seized in late 2008. Berkshire has largely sold the common equity it received in General Electric from that deal.
With GE facing investor uncertainty over long-term liabilities within its GE Capital segment, a deal with Berkshire Hathaway could also include a reinsurance contract in order to remove one, of many, uncertainties surrounding the firm.
Scott Davis, of Melius Research, a consistent bull on General Electric voiced confidence today that the deal with Berkshire would be completed and signal a bottom in shares of GE. Deanne Dray, from RBC, echoed that viewpoint, saying, “In many ways, GE’s current situation fits the profile of an ideal Warren Buffett investment.”
Still, neither company has commented on the rumors and until an official announcement is made, Berkshire’s investment in General Electric is still just that – a rumor.