NEW YORK (CNNfn) - Billionaire investor Warren Buffett expanded his insurance empire Friday by acquiring reinsurance giant General Re Corp. in a blockbuster deal valued at $22 billion.
Under terms of the deal, Buffett's Berkshire Hathaway Inc. will acquire the nation's largest reinsurance company through a tax-free exchange of stock -- an unusual move for the billionaire investor, who prefers to pay for his deals with cash.
But Buffett -- who ranks second only to Bill Gates as the nation's richest businessman -- told reporters the steady appreciation in Berkshire's stock allowed him to issue newly created shares without having current shareholders suffer much dilution.
"It was the ability to use the stock of Berkshire in a way that benefited the General Re shareholders without hurting the Berkshire shareholders," Buffett said during a news conference in midtown Manhattan.
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Shareholders of Stamford, Conn.-based General Re will own about 18 percent of Berkshire Hathaway as a result of the transaction.
Under the terms of the agreement, General Re shareholders will have the option of accepting either 0.0035 class A shares (BRK.A) or 0.105 class B shares (BRK.B) of Berkshire. Based on Thursday's closing prices, the deal would be worth about $276.50 a General Re share, roughly 25 percent above Thursday's closing price.
General Re's stock (GRN) closed down 3-1/4 at 220-1/4 in New York Friday. However, in composite trade, which reflects trading on West Coast markets, General Re shares zoomed 51-1/2 to close at 275. Berkshire's class A shares closed up 1,900 to 80,900.
In exchange, the transaction will bring Berkshire more than $24 billion in additional investments to manage through its 12-person office in Omaha, Neb., bringing the total amount of assets under management to an astonishing $133 billion.
In addition, Berkshire will be able to offer its other insurance subsidiaries coverage. Reinsurance companies indemnify other insurers against all or part of the risks they assume when they issue a policy. The General Reinsurance unit accounts for half of General Re's sales.
Berkshire is a holding company with a variety of subsidiaries, including operations in the property and casualty insurance business conducted on both a direct and reinsurance basis. Among the group of subsidiaries is GEICO Corp., the seventh largest auto insurer in the United States, and National Indemnity.
Industry analysts said the deal, announced after the market had closed Friday, further solidifies Buffett as a formidable competitor in the insurance business.
"With this transaction, Berkshire is now clearly an insurance company that will generate excess capital and cash flow that can be invested and, of course, the real synergy here is that Warren Buffett is the master at allocating and using capital and General Re is a company that generates an enormous amount of excess capital, so it's a great fit." Alice Schroeder, insurance analyst at CIBC Oppenheimer told CNNfn.
General Re, the parent company of General Reinsurance, is the largest property/casualty reinsurer in the United States. The company, which employs 3,869 people, operates in more than 30 countries and had 1997 sales of $8.25 billion.
"This combination virtually assures both Berkshire and General Re shareholders that they will have a better future than if the two companies operated separately," Buffett said in a statement.
CIBC's Schroeder said the deal was not a surprise because General Re was undervalued and Buffett has a knack for acquiring undervalued companies.
Ron Ferguson, chairman and chief executive officer of General Re, will join Berkshire's Board of Directors.
General Re will operate independently of Berkshire's other insurance and reinsurance operations.
"I am very enthusiastic about our merger with Berkshire," Ferguson said. "The combined entity is a unique and extraordinary business model that provides us with the long-term commitment, the financial resources and the optimal platform to serve our clients and, thus, grow our franchise. General Re's future has never been brighter."
Under the terms of the agreement, General Re has agreed to grant Berkshire options to purchase, subject to certain terms, up to 19.9 percent of the outstanding General Re shares at the transaction price, subject to a cash limit of 3 percent of the aggregate consideration.
The companies said they hope to complete the deal in the fourth quarter.