Finance History | Gillette Factory, Boston, 20 July 1989 — US$600 Million Combined an 8.75 Percent Dividend with Equity Upside

On 20 July 1989, Berkshire Hathaway and Gillette documented an investment under which Berkshire acquired US$600 million of Gillette cumulative convertible preferred stock in 1989 dollars. The preferred carried an 8.75 percent annual dividend, implying US$52.5 million of yearly preferred dividends in 1989 dollars while the full issue remained outstanding. It was scheduled for mandatory redemption after ten years and could be converted into Gillette common stock at US$50 per share in 1989 dollars. That combination placed Berkshire between creditor and common shareholder. The dividend and redemption terms offered contractual cash flows, while the conversion right allowed participation if Gillette's common equity increased sufficiently in value. The protection was incomplete. Preferred dividends depended on the issuer's financial capacity and legal obligations, and a fixed redemption amount could lose purchasing power or become less attractive if better opportunities appeared during the ten-year commitment. Conversion also had a threshold. If the common stock did not rise enough, the equity option could expire without contributing value, leaving Berkshire with a preferred-stock return after surrendering liquidity. Gillette's operating economics made that trade-off different from Berkshire's similar 1989 preferred investments in an airline and a paper producer. Razors and replacement blades linked an installed base of shaving systems to repeat consumer purchases, although brand loyalty, product innovation, retail distribution and competition remained essential. The preferred shares carried voting rights on an as-converted basis, and Warren Buffett joined Gillette's board, giving Berkshire influence without acquiring the company. In 1991, the preferred was converted into common shares, replacing the contractual dividend and redemption claim with direct participation in Gillette's residual equity value. The South Boston factory campus anchors the investment to the productive system behind the security. The site represents a US$600 million commitment in 1989 dollars whose design joined current income, principal protection and an option on the future economics of a global shaving franchise. Photo: Pi.1415926535, CC BY-SA 4.0, via Wikimedia Commons.