Earning Profits from Stock Warrants
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Case Code: CLFIN030 Case Length: 4 Pages Period: 2011-2020 Pub Date: 2021 Teaching Note: Available |
Price: Rs.200 Organization : Bank of America Corporation Industry :Financial Services Countries : United States Themes: Stock Warrant, Debt Instruments |
Abstract
The case study discusses ace investor Warren Buffett’s Berkshire Hathaway, Inc. (Berkshire) securing a private placement deal with Bank of America Corporation (BoA) in 2011. Berkshire paid US$5 billion in cash to BoA in exchange for Cumulative Perpetual Preferred Stocks and Warrants to purchase 700 million common shares of BoA. Later, in 2017, Berkshire exercised BoA’s warrants and brought 700 million common stock of BoA. This move helped Berkshire to get US$11.50 billion capital gains in six years.
Against the backdrop of this story, the case helps learners understand warrants and various related financial instruments and concepts. It helps them get to know about the significance of warrants, different types of warrants, and how stock warrants are useful to the issuer and investor, among other things. Additionally, it also helps them understand the difference between a stock warrant, employee stock option, and option.
Issues
- To understand what stock warrant and other similar financial instruments are.
- To understand the difference between stock warrant, employee stock option, and options.
- To understand the advantages and risks associated with stock warrants.
Introduction
In 2020, Bank of America Corporation (BoA) was the second-largest bank in the US with an assets base of US$2.26 trillion (Refer to Exhibit I for list of top 15 largest banks in the US by Assets). The bank had generated US$85.53 billion in revenues, net to interest expense, and US$17.89 billion in net profits by the end of December 31, 2020. It also ranked 25thamong the largest Fortune 500 corporations in the world. Earlier, in 2011, BoA was struggling financially due, among other things, to the unfortunate acquisition of Countrywide Financial in 2008, US$8.8 billion losses in the second quarter of 2011 because of huge legal settlements due to mortgage loans, and various legal issues related to the subprime mortgage crisis.
Keywords
Stock Warrant; Debt Instruments; Convertible Securities; Bank of America Corporation; Warren Buffett; Berkshire Hathaway, Inc.; Warrant; Types of warrant; Various risks associated with warrants; significance of a stock warrant
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