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Warren Buffett Case Study Essays

Background

In 1965, Warren E. Buffet and his partners acquired control of Berkshire Hathaway, believing they could reverse the financial decline. Over the next 20 years, the textile group generated enough cash to purchase two insurance companies and acquired several others over the next decade, leading to their exit of the textile industry in 1985. From 1977 to May 24, 2005 Hathaway’s share price rose from $102 to $85,500 per share.

Buffet is known worldwide as a financial genius and gives credit to his college professor, Professor Benjamin Graham, at Columbia University for laying the foundation of value investing for him. On May 25, 2005, Buffet announced that Berkshire Hathaway’s subsidiary, MidAmerican Energy Holding Company, would acquire PacifiCorp, an electric utility company, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock.

This was the second largest deal of his career. Buffet had previously been looking for an extremely large investment in the utility industry of between $10 and $15 billion since he wanted to put to better use the $43 billion cash balance on hand earning minimal returns. At this point in time only these extremely large investments would have a significant enough increase in net worth to be worthwhile. At the time of announcement Berkshire Hathaway’s Class A shares closed up 2.4% with a market value gain of $2.17 billion. On the other side, Scottish Power plc (parent of PacifiCorp) closed up 6.28%.

Analysis/Assumption

  • Purchase Value: $5.1 billion cash; $4.3 billion liabilities and preferred stock
  • Target annual growth rate of intrinsic value: 15%
  • ROE of PacifiCorp: 7.46%
  • PacifiCorp Average Enterprise Value from Multiples: $8.015 billion oCompetitor’s Average Enterprise Value: $7.955 billion
  • PacifiCorp Average Market Value from Multiples: $5.042 billion oCompetitor’s Average Market Value: $4.551 billion

Recommendation

PacifiCorp is an excellent investment for Buffet and Berkshire Hathaway. According to their acquisition criteria released in the 2004 annual report PacifiCorp meets at least 5 of the 6 principles needed. They are considered a large purchase with pretax earnings at $656 million and have positive earnings growth over the last two years (only two years of data available).

PacifiCorp already has management in place with steady growth meaning it would be simple for Berkshire Hathaway to take over without large amounts of restructuring. In addition to the beneficial, qualitative factors of PacifiCorp, the company’s fundamentals prove the company will be a successful investment. Referring to Exhibit 10 in the case, looking at its relative enterprise valuation based on operating measures (e.g., revenues, operating profit, and net income), it yields an average enterprise value of $8.015 billion, which is higher than its primary competitors.

Also, when comparing PacifiCorp’s average relative valuation of expected market value it yields $5.042 billion, better than the firm’s primary competitors’ average of $4.551 billion by 11 basis points. Buffet has a knack for selecting underperforming companies and turning them around to industry leaders, and this company fits into his portfolio of typically “boring,” yet profitable companies.

Warren E Buffett, 2005 Essay

7784 WordsSep 3rd, 201232 Pages

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WARREN E. BUFFETT, 2005

On May 24, 2005, Warren E. Buffett, the chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. In Buffett’s largest deal since 1998, and the second largest of his entire career, MidAmerican would purchase PacifiCorp from its parent, Scottish Power plc, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. “The energy sector has long interested us, and this is the right fit,” Buffett said. At the announcement, Berkshire Hathaway’s Class A shares closed up 2.4% for the day, for a gain in market value of $2.55…show more content…

What were Buffett’s probable motives in the acquisition? What did Buffett’s offer say about his valuation of PacifiCorp, and how would it compare with valuations for other regulated utilities? Would Berkshire’s acquisition of PacifiCorp prove to be a success? How would Buffett define success?

Berkshire Hathaway Inc. Berkshire Hathaway was incorporated in 1889 as Berkshire Cotton Manufacturing, and eventually grew to become one of New England’s biggest textile producers, accounting for 25% of the United States’ cotton textile production. In 1955, Berkshire merged with Hathaway Manufacturing and began a secular decline due to inflation, technological change, and intensifying competition from foreign competitors. In 1965, Buffett and some partners acquired control of Berkshire Hathaway, believing that its financial decline could be reversed. Over the next 20 years, it became apparent that large capital investments would be required to remain competitive and that even then the financial returns would be mediocre. Fortunately, the textile group generated Berkshire Hathaway "Class A" vs. S&P 500 Composite Index enough cash in the initial $100,000 years to permit the firm to purchase two Berkshire Hathaway Inc. "A" insurance companies $10,000 headquartered in Omaha: National Indemnity Company and National $1,000 Fire & Marine Insurance S&P 500 Composite Index Company. Acquisitions of other

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