Warren Buffett poured $3 billion into Dow Chemical during the financial crisis. Here's the story of how he helped the manufacturing titan – and doubled his money.

• Warren Buffett invested a vital $3 billion in Dow Chemical at the height of the financial crisis.
• In return, Berkshire Hathaway received preferred stock paying a yearly dividend of 8.5%.

Warren Buffett poured $3 billion into Dow Chemical in the depths of the financial crisis, helping the manufacturer to complete an acquisition at a time when investors, lenders, and companies were taking cover.

Here's the story of one of Buffett's signature deals, which provided much-needed cash to an ailing company – and earned him a healthy return.

Financial chemistry

Dow agreed to buy Rohm and Haas for nearly $19 billion including debt in July 2008, and roped in Warren Buffett's Berkshire Hathaway to help with the financing. The acquisition was part of Dow's strategy to shift its focus away from bulk chemicals toward higher-margin, specialty chemicals.

Buffett agreed to put up $3 billion in exchange for 3 million Series A convertible preferred shares, which paid an 8.5% dividend, or $255 million a year. Preferred shares often offer larger dividends than common shares, and holders take priority when it comes to dividend payouts.

Dow had the option to convert some or all of Berkshire's preferred stock into common stock starting in April 2014, at a ratio of 24.201 common shares for each preferred share. The maker of chemicals, plastics, agroscience products, and advanced materials could only do so if its stock price exceeded $53.72 for 20 trading days in a 30-day period.

Adverse reaction

Dow's takeover proved to be poorly timed. Lehman Brothers collapsed two months later, causing credit markets to seize up, asset prices to plunge, and shockwaves to reverberate through the housing market and the wider US economy.

The chemicals giant had planned to cover a big chunk of the deal's cost using $9 billion of proceeds from a joint venture with Kuwait's Petrochemical Industries. However, the state-run company scrapped the partnership in December 2008, sending Dow stock plunging.

"The world fell apart," Buffett told CNBC in 2017, recalling that Dow tried and failed to back out of acquiring Rohm and Haas. "We closed the deal to buy the stock in April 2009, by which time the market had totally disintegrated."

Given the collapse in Dow's stock and its weakened prospects, Buffett found himself paying the equivalent of a dollar for 60 cents, he said.

"We showed up with $3 billion for something that was worth about $1.8 billion maybe at the time," Buffett noted. "Which is one reason people offer us deals – they know we'll be around at the closing."

Indeed, Buffett struck agreements with not only Dow but also Goldman Sachs, General Electric, Mars, and Swiss Re between 2008 and 2009. He deployed a total of $21.1 billion across those five transactions, securing positions worth a combined $26 billion at the end of 2009, which were yielding $2.1 billion in dividends and interest annually.

However, the cash-conscious investor sold shares of companies like Moody's, Procter & Gamble, and Johnson & Johnson to fund the deals and avoid depleting Berkshire's cash reserves, which dropped below $20 billion in April 2009. He also refrained from capitalizing on some of the enticing opportunities that popped up.

"During that whole period, we had these commitments and that kept me from doing some other things we might have done at that time — the fact that we had this $3 billion going out the door," he told CNBC, referring to Berkshire's investment in Dow.

As for Dow, Buffett's money and vote of confidence helped to assuage fear on Wall Street that the company had bitten off more than it could chew and might tumble into insolvency.

"The stake was taken at a time when Dow was really desperate," Hassan Ahmed, an analyst at Alembic Global Advisors at the time, told Reuters in 2010.

Buffett may have felt he massively overpaid, but the deal he negotiated was still lucrative.

"Those preferred shares are yielding a lot," Ahmen said. "Purely on a financial basis, I'd like to knock him out."

Producing profit

Dow paid supersized dividends to Buffett for more than seven years. In December 2016, it finally converted Berkshire's preferred shares into 72.6 million common shares, freeing itself from the costly commitment.

Buffett and his team had no interest in owning Dow's common stock, so they sold all of the shares they were set to receive ahead of time. Dow redeemed the stock on December 30, and Berkshire was out of the position entirely by the end of the next day.

Berkshire made about a $1 billion profit from selling the Dow stock, Buffett told CNBC. The company also collected over $1.8 billion in total dividends from its preferred stock. As a result, Buffett made about a $3 billion pre-tax return, or roughly double what he invested.

Dow's then-CEO, Andrew Liveris, tipped his hat to Buffett.

"He's done very well with that investment, as he has done at Goldman and elsewhere," he told Reuters. "He was incredibly valuable through the crisis."