152 THE WARREN BUFFETT WAY
priced at a premium to the common stock. This premium is ref lected in
the rate at which the preferred is convertible into common shares. Typi-
cally, the conversion premium may be 20 percent to 30 percent. This
means that the common must rise in price 20 to 30 percent before
the convertible stock can be converted into common shares without los-
ing value.
In the same way that he invested in high-yield bonds, Buffett in-
vested in convertible preferred stocks whenever the opportunity pre-
sented itself as better than other investments. In the late 1980s and
1990s, Buffett made several investments in convertible preferred stocks,
including Salomon Brothers, Gillette, USAir, Champion International,
and American Express.
Takeover groups were challenging several of these companies, and
Buffett became known as a “white knight,” rescuing companies from
hostile invaders. Buffett, however, certainly did not perceive himself as a
pro bono savior. He simply saw these purchases as good investments
with a high potential for prof it. At the time, the preferred stocks of these
companies offered him a higher return than he could f ind elsewhere.
Some of the companies issuing the convertible preferred securities
were familiar to Buffett, but in other cases he had no special insight about
the business nor could he predict with any conf idence what its future cash
f lows would be. This unpredictability, Buffett explains, is the precise rea-
son Berkshire’s investment was a convertible preferred issue rather than
common stock. Despite the conversion potential, the real value of the pre-
ferred stock, in his eye, was its f ixed-income characteristics.
There is one exception: MidAmerican. This is a multifaceted trans-
action involving convertible preferred and common stock as well as debt.
Here, Buffett values the convertible preferred for its f ixed-income re-
turn as well as for its future equity stake.
MidAmerican
On March 14, 2000, Berkshire acquired 34.56 million shares of con-
vertible preferred stock along with 900,942 shares of common stock in
MidAmerican Energy Holdings Company, a Des Moines-based gas and
electric utility, for approximately $1.24 billion, or $35.05 per share.
Two years later, in March 2002, Berkshire bought 6.7 million more
shares of the convertible preferred stock for $402 million. This brought