Buffett: Omaha Gold

Patrick Hosking

Investment bankers describe every deal ever done as a win/win for both sides. Few turn out quite like that. But Warren Buffett's deal to buy into Goldman Sachs may actually be one of these rare golden transactions.

For Buffett, he gets a sizeable stake in Wall Street's premier money-making machine and at a bargain price. The preferred shares pay a juicy 10 per cent coupon and Goldman has to pay an additional 10 per cent premium if it wants to buy him out. The warrants to buy ordinary shares at $115 a share are already showing a decent profit for Buffett. In pre-market trading this morning, Goldman shares surged to $135.

For Goldman, it gets a seal of approval from the most sagacious long-term investor on the planet. It also gets $7.5 billion of additional capital. If Congress derails the $700 billion bailout plan, we are heading for a fresh period of market turmoil where no bank can be regarded as overcapitalised. If the bailout plan works, Goldman will have the firepower to buy distressed assets back from the Government at what it hopes will turn out to be bargain prices. Either way, it is suitably prepared.

There are downsides, however. Goldman can expect to be accused of selling itself a little too cheaply. Buffett, no fan of Wall Street in normal times, may be accused of breaking his cardinal rule of investing only in simple to understand businesses where there is long-term visibility

Smiths Group: Bowman's aim

Nick Hasell

For a measure of the regard in which the City holds Philip Bowman, look no further than Smiths Group’s share price. In the year since the former Allied Domecq and Scottish Power boss was hired as chief executive, the £4 billion engineering conglomerate has outperformed the FTSE all share by 27 per cent.

Inevitably, given the scale and complexity of Mr Bowman’s task, the shares continue to run ahead of a commensurate transformation in underlying trading. Today’s full-year results, albeit modestly ahead of forecasts, might be best described as solid rather than sparkling: underlying sales were up 6 per cent and pre-tax profits ahead 10 per cent.

But it was the detail of Mr Bowman’s turnaround plan that was more eagerly awaited. First, the company, now split into five divisions, aims to produce annual cost savings of £48 million within three years. Second, Mr Bowman has set sales and margin targets for each division which, in aggregate, imply a pick-up in growth rates over current forecasts. These have also been accompanied by a matching management incentive scheme

Progress has already been made. Smiths’s large head office has been abandoned for more modest premises, and the backlog of orders in its underperforming medical systems division has already fallen 90 per cent on the year.

But the challenges have only increased since Mr Bowman took office. Selling Flex-Tek, which supplies the US housing market, appears out of the question for now. The proposed $700 billion bail-out of Wall Street might also have knock-on effects on capital spending elsewhere: through Smiths’s detection and interconnect businesses, the US government is a big customer.

With much of its sales drawn from oil and gas, healthcare and security, Smiths might be considered relatively defensive. What is less easy to protect is Smith’s share price premium to its engineering peers - of some 35 per cent on today’s forward multiple of 13 times. That suggests further near-term share price outperformance will be harder to achieve.

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