In GE's case, they made two sales. The first was a sale of perpetual preferred shares to Warren Buffett and then the second was a seasoned equity offer that sold at a discount.
" General Electric Co. raised $12.2 billion by selling 547.8 million shares at a discount of 9.2 percent to yesterday's closing price, giving it more cash to fund operations in the worst U.S. financial crisis since the Great Depression....The sale dilutes the value of GE stock by about 6 percent to 7 percent, Citigroup analyst Jeffrey Sprague said in a note to investors yesterday. He rates GE a ``hold/medium risk.'' ``While this was clearly a difficult step to take, it should give GE more operating and strategic flexibility,'' Sprague said in his note."The article goes on to say that GE also suspended its Buyback plan which is consistent with the widely acknowledged view that buyback plans are more likely to be cut than dividends.
and on to the Buffett deal:
Buffett to Invest Billion in G.E. - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:
"...G.E.’s concessions to Mr. Buffett are steep. The perpetual preferred stock carries a dividend of 10 percent, and can be repurchased after three years at a 10 percent premium. Berkshire Hathaway will also receive warrants to buy $3 billion of common stock at $22.25 within the next five years."A very fast look at the NUMA option calculator suggests that these options are worth nearly a billion dollars themselves! (used 60% as volatility based off of this article rather than actually computing using any LEAP implied volatilities)--if you use the historical standard deviation-for which a case could be made since the warrants have longer term life, the value drops to less than $500m). Thus, the warrants alone are worth at least 16% of the initial investment of $3b.
I am not sure what any of this means to future tests of Buffett's ability to "beat the market". On one hand because of reputation and wealth is being granted investment opportunities that the typical investor does not have. Thus to be held accountable to the "market" portfolio seems an unfair advantage. But on the other side, investing in a risky time, clearly makes performance measures that are based on historical metrics (be they Standard deviation or beta) incorrect.). So, since I am not sure what to say, I will merely say that Buffett is doing nothing here to hurt his reputation as the one of the world's best investors.