Warren Buffett General Re Investment. Why Warren Buffett invested in General Re and eventually acquired it in 1998. In one of the largest deals in history, Buffett acquired General Re for $22 billion in Berkshire stock in 1998. The purchase price represented a 29% premium to General Re’s closing price. The all-stock nature of the transaction allowed it to be tax-free.
General Re was the largest reinsurance company in America. It also had a large international presence and earned $1 billion a year in the years before Buffett’s purchase. Buffett argued that the investment was advantageous because of the synergies that it could generate. He notes that after the merger, General Re would be able to focus on its world-class underwriting instead of having to worry about tax considerations and earnings volatility.
Unclear if good Investment, at least in the immediate several years
However, it is unclear if this was a wise investment in retrospect. General Re lost more than $7 billion in the four years after Buffett’s acquisition, compounded by the effects of the 9/11 terrorist attacks. General Re management was also dissatisfied with the purchase – General Re’s president James Gustafson resigned after the Berkshire merger; a number of other senior executives also openly expressed discontent. Buffett later hypothesized that if General Re had remained independent, it might not have survived the 9/11 attacks.
Nonetheless, with the merger, Buffett could argue that even if the underwriting operations did not turn a profit, Berkshire would gain free use of float as long as the reinsurer was not loss-making – the dry-powder cash with a zero cost of capital has great value for Berkshire.