...1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power on the day of the acquisition announcement: Specifically, what does the $2.55 billion gin in Berkshire market value of equity imply about the intrinsic value of PacifiCorp? The possible meaning of the change of the stock is that the facts that are created in the deal had a positive effect on both the buyers ( BRK) and the sellers which are the mother company of Pacific( Scottish power), To find the 2.55 Billion gain of BRK on the market value equity that the intrinsic value of Pacific was good because it was within the range demonstrated in the calculations I have done:- $2.55 billion / 312.8 million = $8.17 (Berkshire is willing to pay this premium for each share of PacifiCorp) 5.1 billion / 312.18 million = $16.30 per share of PacifiCorp $8.17 + 16.30 = $24.47 (all information taken from chart 9) 2. Based upon the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range? We find the range of possible values for PacifiCorp in chart 10:- A. Revenue median of $6.252 Billion, mean of $6.584 Billion. B. EBIT median of $8.775 Billion, mean of $9.289 Billion. C- EBITDA median of $9.023 Billion, mean of $9.076 Billion. D- Net Income median of $7.596 Billion, mean of $7.553 Billion. E- EPS median of $4.277 Billion, and a mean of $4.308 Billion. F- Book value median...
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...Berkshire Industries PLC Berkshire Industries, PLC is a company that consisted of four different divisions. It is a decentralized company, where each department had a considerable degree of autonomy. Departments were "beer", "spirits" (alcohol), "soft" and "snacks". The company's initial public offering after the primary weight of the performance of the EPS was in (earnings per share = Profit / average number of shares for the period). EPS, however, was not an absolute truth, and was associated with a number of concerns. Berkshire was financially strong and growing company. Although the EPS had been growing steadily throughout the last decade, the company's shareholders were not benefiting from the company's share prices had risen only slightly during that period. At the request of the Board and CEO, William Embleton Berkshire began to look for a new performance measurement system and incentive system. He ended up in the CLA's (Corey, Langfeldt and Associates) to provide a solution. The new system, however, was complex and difficult to understand. One problem was that it caused considerable confusion among the leaders. Although due to the new system, there had been arranged a lot of training in connection with, senior management, despite all the prejudices of the leaders do not "got the hang of" how the economic return would have been used as gauges. Some leaders even continued using the old system. Personally, I would maybe try a few in advance with the leaders of the...
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...boots?” and then she walks out on him. 2. The main character in the story: ”Are You Ready, Boots?” is named Lulu. She lives in London (ll. 52-54). Lulu acts as if she lives in a dream world (ll. 8 and ll. 37-38). She is very irresponsible. Both the trip to New York and the boots are bought for money she did not had (ll. 47-48). In relation to boys or more specific Charlie, the superficial side of her appears. All she notes about Charlie is how handsome he is (ll. 65), he has a great tan, blond hair, a beautiful suit (ll. 66- 67). Later when Lulu starts dating Charlie she finds out that he has a good paid job (ll. 91) and therefore can afford to have a Porsche. Furthermore, Lulu talks about Charlie’s parents beautiful house in Berkshire (ll. 102). All the superficial things she think is important to have a perfect live. At the end of the story, Spencer has made Lulu think twice about what she sees in Charlie (ll. 114-115) and on what ground their...
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...nation. His Masters of Science in Economics was completed at Columbia University.... [tags: Berkshire Hathaway] 338 words (1 pages) FREE Essays [view] Warren Buffet - Warren Buffet Warren Buffet of Berkshire Hathaway and His Investment Strategy Warren Buffet is arguably the most successful investor of all time. His initial investment of $105,000 in the beginning, ultimately grew into a $16 billion dollar fortune made from his trading company, Berkshire Hathaway. If you had invested $10,000 in Berkshire Hathaway when he took over the company in 1965, it would be worth $22,000,000 today. Warren’s stockpicking prowess however, is what he is know for and is also why Berkshire Hathaway has had a returning average of 24% a year for the last three decades.... [tags: GCSE Business Marketing Coursework] :: 3 Sources Cited 551 words (1.6 pages) $14.95 [preview] Case Study of Warren E. Buffet - Case Study of Warren E. Buffet In 1995 Berkshire Hathaway has made a bid for the shares of GEICO. This report reviews the offer made by Warren Buffet and will try to prove that the acquisition of GEICO will serve the long-term goal of Berkshire Hathaway and the bid price was appropriate. Furthermore, it will explain what may have caused for the share price increase for Berkshire Hathaway at the announcement of GEICO’s acquisition. Would the GEICO acquisition serve the long-term goals of Berkshire Hathaway.......
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...BERKSHIRE HATHAWAY PURCHASES GEICO WARREN BUFFET Executive Summary Berkshire Hathaway has made a bid for the remaining portion of GEICO stock. This report reviews the offer initiated by Warren Buffett. The details of this report include: • Valuation of GEICO stock. The $70 offer made by Warren Buffett and Berkshire Hathaway includes a 26% premium over the current GEICO stock price of $55.75. This report attempts to determine a range of appropriate stock prices for GEICO. Using the Gordon dividend discount model, along with historical dividend information and projections by Value Line, we estimate the value of GEICO stock in the range of $58 to $80. A review of historical growth rates in GEICO dividends also lends credibility to the investment’s future potential. • Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. • Buffett’s investment philosophy. A letter to shareholders gives us a unique look at Buffett’s considerations for investing. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. • Other issues. Buffett’s position on GEICO’s board of directors may shed light on the amount of information Buffett had about the future prospects of GEICO. At first...
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...Berkshire Hathaway Summary Facts about the Firm Berkshire Hathaway is an American multinational company based out of Omaha, Nebraska, USA & does not resemble the original company that Buffett had bought during the 1960’s. As of 2008, it was active in a variety of sectors, including insurance, regulated utilities & retailing. It is a holding company that manages a number of subsidiary companies belonging to the companies in these variety sectors. In 2008, the revenues of the conglomerate had become $81.7 bn. Warren Buffett has been at the helm of affairs since the inception & still remains the current Chairman and CEO. Charlie Munger, who is his best advisor and has been attached since early days to Buffett is the current Vice-Chairman. Analysis After gaining some experience in investing in firms, his first moderately successful venture being the Dempster Mill Manufacturing, Buffett bought Berkshire Hathaway, a textile mill which he was tracking from some years and then started looking out for other investing opportunities from the profits he made. His target over the years was to invest and acquire Insurance firms which would give him the extra cash needed to invest elsewhere. He carried on a spate of acquisitions over the years using the below acquisition criteria: - * Large purchases (at least $75 million of pre-tax earnings) * Demonstrated consistent earning power (sustainability of the business) * Businesses earning good returns on equity...
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...before Buffett sent his wallet to the winning bidder, he removed a significant and personal item that reveals 10 secrets to his extraordinary wealth-building success. A t a recent auction for a girl’s charity, Warren Buffett’s Wallet was won for a bid of $210,000 because it included a stock tip. Before he sent his 24-year-old wallet to the winning bidder, he removed a significant and personal item that reveals many secrets to his extraordinary wealth-building success. What was the item? I’ll tell you in a moment. First, let me take you back to 1969. At this time, Warren Buffett was in the process of liquidating his Buffett Partnership and focusing his time and energy on building the holding company that’s known today as Berkshire Hathaway. And one of the first businesses he purchased as a wholly owned subsidiary of his new conglomerate was the Illinois National Bank, which was, at the time, the largest bank in Rockford. One of the things that makes this purchase particularly interesting is that, viewed over time, the purchase and management of the bank provides an almost picture-perfect example of the ten investment and management principles that have made Buffett the world’s greatest investor. SECRET NUMBER 1: Invest in an old economy company that’s a leader in an industry you understand. Banking may not be the world’s oldest profession, but it’s one of the oldest, so a bank is clearly an “old economy” company. The Illinois National Bank [INB]...
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...Case 2: Warren E. Buffett. Berkshire Hathaway Question 1: The possible meaning of the change in the stock price of Berkshire Hathaway on the day of the announcement is that the shares of GEICO were undervalued at a price of $55,75 and Berkshire Hathaway paid a $14,25 premium per share. However, even though Berkshire Hathaway paid $70 per share, that price was lower than the fair value of GEICO but the shareholders couldn’t turn the offer down. Consequently, Berkshire Hathaway increased it’s market value by $718 millions because the intrinsic value of GEICO was higher than the price it was sold for. The company had outstanding 1,177,750 shares and on august 25 BH share price changed by positive $609.60. At the end of the session, the price was $25,400. 1,117,750 * 609.60 = 717,956,400 gain. In addition, BH already owned 50.4% of GEICO. GEICO had on april 30 1995 a total of 67,889,574 shares outstanding. BH is buying 49.6% of the total outstanding shares: 67,889,574 * 49.6% = 33,673,229 shares Before the acquisition, BH had a value of Total shares * opening price 1,177,750*24,790.40= $29,196.89 million And GEICO had a value of 33,673,229*55.75=$1,877.28 million Resulting to the BH+GEICO = 29,196.89+1,877.28 = $31,074.17 million After the acquisition, BH had a value of Total shares*closing price 1,177,750*25,400= $29,914.85 million And GEICO had a value of 33,673,229*70=$2357.13 Resulting to the total BH+GEICO = 29,914.85+2357.13 = $32,271.98 million and...
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...Warren E. Buffett, 1995, Case Questions The purpose of this case is to introduce the themes that we will be covering in this course. In fact, if you look at Buffett’s investment philosophy (question 3 below) and compare it to the syllabus, you will find extensive overlap. 1. What is the possible meaning of the changes in the stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement? Specifically, what does the $718 million gain in Berkshire’s market value of equity imply about the intrinsic value of GEICO? (Note that Berkshire owned 33.25 million shares before the acquisition was announced.) Geico stock price will move up on the day of the acquisition announcement. Meant, GEICO intrinsic value also increase, total value will be more than $718 million in the market. 2. How well has Berkshire Hathaway performed? In the aggregate? In its investment in Scott & Fetzer? In its investment in earlier purchases of GEICO stock? Scott & Fetzer conservatively financed with Berkshire Hathaway. Buffett offered to buy the company for $315 million. Scott and Fetzer paid Berkshire Hathaway $125 million. Buffett noted that in terms of return on book value of equity, Scott & Fetzer would have easily beaten the Fortune 500 firms. 3. Please critically assess Buffett’s investment philosophy, and prepare to identify points where you agree and disagree with him. Graham’s approach was to focus on the value of assets, such as cash, net working...
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...Question 1: What is your interpretation of changes in stock prices of Berkshire Hathaway and Scottish Power Plc on the day of acquisition announcement? Answer: Deal announcement cause increment in share price of both Berkshire Hathaway and Scottish Power. The possible reason could be that the investor saw this deal as win-win situation for both the companies. The deal created value for both the company. Berkshire became more diversified and Scottish Power got good value from the deal. A possible reason for increase in share price of Scottish Power may be due to the fact investors saw this acquisition as good sign for Scottish Power and the deal taken as proof that Scottish power is in good condition. It is possible that the investors perceived potential synergies between PacifiCorp and MidAmerican. Question 2: Is the Berkshire's offer for Pacfic Corp was in line with the range of peer firm valuations? Answer: From Exhibit 10, we are able to see the following value for PacificCorp MV Equity as Multiple of: | Average Value | EPS | Book Value | | | | | 4,277 | 5,904 | 5090.5 | 4,308 | 5,678 | 4993 | In the case it is stated that the deal will take around 12 to 18 months to close. We will now calculate the PV of the deal. Risk free return rate as per case is 5.76% Beta for Berkshire is 0.75 The long term market return is 10.5% Cost of equity for Berkshire = 5.76+0.75(10.5-5.76) =9.32 % Using this...
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...Advantage Anything that prevents a business’ extraordinary return on capital from being whittled down to mediocrity by the ravages of competition. Where a business enjoys a durable competitive advantage it is said to have a franchise. Sometimes, a business will have a durable competitive advantage without earning an extraordinary return on capital in the aggregate. In a few cases, a business will have a durable competitive advantage without earning an extraordinary return on capital in any line of business. It is even possible for a currently unprofitable business to have a durable competitive advantage. But, this is a very special case. For instance, an unprofitable business may have a durable competitive advantage if it is the low – cost operator in an inefficient, highly fragmented industry, if and only if, the sole cause of unprofitability is inadequate sales volume. This is most likely to be true in an industry where efficient, low cost operations can only be carried out after a substantial infrastructure investment and can not be sustained at a low sales volume. In such a case, it would not be surprising to see the established, efficient (and unprofitable) business secure a dominant share of the fragmented industry and earn an extraordinary return on capital once sales volume has increased. Where a marginal sale is ridiculously profitable, advertising costs will serve to entrench the position of the business with the highest volume and the lowest costs. ...
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...refining experience. Independent Insurance’s NEDs did not have insurance industry expertise. 2 BOARDS' RISK BLINDNESS This is characterised by a board’s failure to engage with important risks, such as risks to reputation and “licence to operate”, to the same degree that they engage with reward and opportunity. For example, Railtrack’s licence to operate depended on the UK government, but the company outsourced track maintenance, despite the fact that this was one of its core responsibilities to its customers. 3 POOR LEADERSHIP ON ETHOS AND CULTURE Double standards were perceived in cases such as Maclaren’s dealing with its US and UK push-chair (baby stroller) recalls and Société Générale’s ignoring breach of trading limits by Jérôme Kerviel. 4 DEFECTIVE COMMUNICATION Railtrack and Network Rail did not communicate effectively with subcontractors. In the EADS Airbus A380 case, problems of nonmatching aircraft sections were kept from senior managers for six months. 5 EXCESSIVE COMPLEXITY The EADS Airbus A380 project involved immense...
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...GEICO’s intrinsic value was larger than purchase value, Berkshire Hathaway’s intrinsic value increased, so the stock price went up. The $718 gain in Berkshire’s market value implied that investors thought that: GEICO was underestimated, Berkshire bought it with a cheap price. C) Total dividend is much larger than purchase price. In all, it is a super good investment. (3) About early investment in GEICO: (4) Convertible preferred stocks: A) Interest rates are very high (compare to the yield of the 30 year U.S. Treasury bond: 6.86%): about 9% on average. B) Most convertible preferred stocks’ market values are larger than par values. In all, they are very good investments. 3、 (3) Estimated method Discounted free flows of cash of the business: We estimate the future free cash flow of every year, and specify the discount rate, the discount rate maybe the long term bond’s yield or the average cost of equity. Then we can calculate the present value of the business. (4) Alternatives to intrinsic value are market value and book value. (5) Why Buffett rejects book value and market value: Book value only reflects the past history of a business’s net asset, it does not mean the business’s future earnings. Market value is not stable, it may be larger or smaller than the intrinsic value greatly. Range of possible intrinsic values for GEICO: 125/(1+ 11%)^5) = 74.18 Why the estimated cost of equity is so high? If we use 30 year ...
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...Case 1: Warren Buffett 1995 Question 1: Warren Buffett's (Buffett) track record as a value investor and sheer financial strength has earned him an incredibly valuable reputation within the financial industry. Being an anomaly in the investment world; when he talks – the market follows. This is noticeably seen in the increase in equity of $718 million. ------------------------------------------------- Question 2: GEICO Outstanding shares April 30, 1995: 67.89 million, of which 34.22 million owned and 33.67 million purchased at $70; total price $2.3 billion. A Capital Asset Pricing Model (CAPM) derived cost of equity equaled 10.99% percent via a risk-free rate of 6.86 percent, a beta of 0.75, and an equity risk premium of 5.5 percent. k = 6.86 + 0.75 ((5.5)) = 10.99% Using Value Line’s forecast & the above discount rate and share information: the following low end & high end NPV are calculated: Low end: -$335.57 High end: $389.89 For methodology in calculation of intrinsic value refer to ‘1995-Question 2’ in the accompanying “excel“spreadsheet for the analysis. Using Value lines cost of equity; the investment yields a negative Net Present Value (NPV) on the low end. The investment will not add value to the firm and the acquisition of GEICO doesn’t seem to be a good one. The high end range yields a positive NPV showing the investment rather is rather a prudent one. The discount rate used is highly subjective and is influenced by the risk premiums chosen...
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...Case Study 2: Warren E. Buffett, 1995 This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hathaway’s shares closed up 2.4 percent for the day, for a gain in market value of $718 million.1 That day, the Standard & Poor’s 500 index closed up 0.5 percent. The acquisition of GEICO renewed public interest in its architect, Warren Buffett. In many ways he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $7 billion), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28 percent from 1965 to 1994),2 Berkshire Hathaway paid him only $100,000 per year to serve as its CEO. Buffett and other insiders controlled 47.9 percent of the company, yet Buffett...
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