Borrowing money isn't an art, it's a science. If you can get money at 2% with a weak balance sheet versus 8% with a decent balance sheet you take that money regardless of who is offering it.
I know that sounds pretty stupid. Of course, you grab the lower rate. But in the real world this week we saw something utterly amazing happen: Vicki Hollub, the CEO of Occidental (OXY) is borrowing $10 billion from Warren Buffett (Berkshire Hathaway (BRK.A) (BRK.B) )with an 8% coupon as part of the financing needed to purchase Anadarko (APC) for $38 billion. That's staggeringly expensive money.
On the other hand, Elon Musk is helping to fund Tesla's (TSLA) needs by borrowing $1.6 billion at 2% in the form of a convertible bond offered by Goldman Sachs (GS) which actually rates the stock a sell. That's incredibly cheap money. Given where long-term rates are I could say the money's being given away.
Tesla also offered 3.1 million shares at $243 of which Musk bought $25 million worth. With the stock flying higher after the pricing, it's a good deal for anyone who participated in it. Musk can't flip it; insiders aren't allowed to trade their own stock. They have to own it for six months. But you can if you were in the deal.
Unlike the Buffett money, which could be a noose around the neck of OXY, the Goldman raised money gives Musk plenty of breathing room and takes near-term pressure off the company.
Let's puzzle over this one. Buffett apparently was willing to give Holub as much as $20 billion at that 8% rate. Who can blame him: that's far more than it would cost if Oxy had just gone to a bank for a loan or go to Goldman Sachs like Musk did for financing. But CEO Hollub apparently loves the imprimatur of Buffett. If you are a shareholder you should hate this deal. The company offers a very high dividend that yields 5.3%. Now, though, that common stock dividend does not have preference versus Buffett's piece of paper. That's rather galling.
I understand that there was a need for speed here: Buffett offered instant money which was imperative for Hollub given that she's competing for Anadarko against the much larger Chevron (CVX) with a better balance sheet and endless fire power. But exigencies, to me don't justify this one because if oil goes down big she's on the hook for a giant slug of cash. You don't gamble your company ever, and I think that's precisely what she's doing.
Musk, on the other hand, is a genius to do this deal the way he did. Hollub sought the prestige of Buffett. Musk sought the blessing of Goldman Sachs which has a sell on the stock. Goldman's basically dismissing its own research department to get this done. That's impressive.
Oxy's Hollub? Look, we all know that Warren Buffett's the greatest investor of all time. Whatever he touches does tend to turn to gold. For example, the stock of Amazon (AMZN) is soaring today on the news that a portfolio manager within Berkshire's stable bought some shares in the company. Even though the stock has had a gigantic move of late, the camp followers couldn't resist.
I think that's nuts. I have been a big fan of Amazon and its stock for years and years. But I question why buy it up $50 on this news. You think we are going to hear that he bought more on Monday? It's not a catalyst worth pursuing.
That kind of hero-worship just doesn't make sense.
On the other hand the buying of Tesla's stock on the deal because Musk bought turned out to be darned rational. You are getting it at the same price as he did - $243 - and it was natural that once the money came in, a key prop for the shorts - that he is running out of money - was gone.
I salute Musk for what he did. But Hollub? I am calling it ill-advised. There's very little justification for paying usurious rates when there's most likely money to be had for the same price as the common dividend. I hope it works for Oxy, but hope should never be part of the investing equation.