...What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.17-billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? The changes of the stock price for Berkshire Hathaway and Scottish Power plc is due to the fact that the deal between these two companies created value, indeed it created value for the buyers and the sellers because for example thanks to this acquisition Berkshire is more diversified. Moreover, we can also say that the stock prices of Berkshire Hathaway and Scottish Power plc changed due to the variety of products produced by these two companies, for example Berkshire Hathaway has eight types of different products, from insurance to wholesale distributing. The fact that this deal creates value for both buyer and seller prove that the overall market approves it. The $2.17 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good. Indeed according to these calculations we can say that its value and its competitors ones are in the same range (see exhibit 9). $2.17 billion312,18 million =6.95 This is what Berkshire is willing to pay for each share of PacifiCorp. 5.1 bilion312.18 million=16.30 6.95+16.30=$23.25 2. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about...
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...1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.17 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? a. The possible meaning of the changes in stock price is due to the fact that the deal created value for both buyers and sellers; Berkshire was more diversified after the acquisition. The significant change in stock prices for Berkshire Hathaway and Scottish Power plc is partially due to the wide variety of products produced under these names. The approval of these investments and products are indicated by the overall market because they are creating value for both the buyer and the seller. Berkshire Hathaway is responsible for eight different types of product ranging from insurance and financial products to retail including wholesale distributing and apparel along with an array of smaller businesses. b. The $2.17 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good because it fell within the range of competitors based on the following calculations: $2.17 billion / 312.18 million = $6.95 – Berkshire is willing to pay this premium for each share of PacifiCorp 5.1 billion / 312.18 million = $16.30 per share of PacifiCorp $6.95 + 16.30 = 23.25$ (see Exhibit 9) 2. Based on the multiples for...
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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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...possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.17-billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? May 24, 2005 marked the day of Warren Buffett’s (CEO of Berkshire Hathaway Inc.) largest acquisition since 1998. On this day it was announced that the electric utility company PacifiCorp was going to be acquired by the Berkshire Hathaway subsidiary, MidAmerican Energy Holdings Company. PacifiCorp was purchased from their “parent” company Scottish Power plc. PacifiCorp was created in 1984. They provide electricity to citizens throughout California, Oregon, Idaho, Utah, Washington, and Wyoming. Warren Buffett was looking to expand Berkshire Hathaway’s interests more deeply in the energy field. After all was said and done, MidAmerican ended up purchasing PacifiCorp from Scottish Power plc for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. Management at each company felt as though the deal was great for all those involved. Scottish Power’s CEO Ian Russell stated “we strongly believe that this transaction is in the best interests of PacifiCorp’s customers and employees” (18). The deal to acquire PacifiCorp by MidAmerican Energy Holdings Company resulted in a positive stock price increase for both Berkshire Hathaway and Scottish Power plc. Berkshire Hathaway’s Class A shares noticed a gain of 2...
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...acquisition of PacifiCorp increased Berkshire Hathaway’s intrinsic value. Background or Historical Perspective: Berkshire Hathaway was incorporated in 1889 as Berkshire Cotton Manufacturing and later merged with Hathaway manufacturing in 1955. In 1965, Warren Buffett and some partners gained control of Berkshire Hathaway. Buffett invested in companies from various sectors of the market ranging from insurance to clothing apparel. Over the next few decades since Buffett originally acquired Berkshire Hathaway, Buffett became famous as investment genius with an unbelievable growth percentage of 24%. Class A shares of Berkshire Hathaway traded at $102 in 1997 to $85,500 in 2005. Analysis and discussion: The stock price jump for both Berkshire Hathaway and Scottish Power plc means that investors are very optimistic about this move. The increase in Berkshire Hathaway’s market value of $2.55 billion means that the intrinsic value of PacifiCorp will add value to Berkshire Hathaway. The value of PacifiCorp ranges from $6.25 Billion to the $9.4 Billion paid to acquire PacifiCorp. The only aspect of this acquisition is why did Berkshire Hathaway pay so much for this acquisition? The only reason why Berkshire Hathaway would pay so much for an acquisition is that Buffett perceive PacifiCorp’s intrinsic value as more than $6.25 Billion. Berkshire Hathaway has performed extremely well with an annual growth percentage of 24%. By comparing Berkshire Hathaway’s Class A stock with the S&P...
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...Week 2 Case; Warren Buffet, 2005 Introduction This case is about Berkshire Hathaway’s bid, through MidAmerican Energy Holdings Company, to acquire PacifiCorp, which is an energy- utilty based company, in order to diversify the activities of Berkshire Hathaway. The ideas of enterprise valuation are portrayed in two methods. These methods are multiple valuation and discount factor. These methods help evaluate the impact that a single investment can have on the acquiring company. Issues The stock prices for Berkshire Hathaway’s increased 2.4% and Scottish Power plc increased 6.28% after the acquisition of PacifiCorp. This positive market reaction was a good indicator that the deal had been a good move for both parties. The 2.55 billion gain in Berkshire’s market value hints that Berkshire Hathaway paid the acquisition at a discount price per share. Scottish power’s increase represented an increase of GBP27.75 in per-share change. The shares outstanding were over 466 million and the market value that day was 12.93 billion British pound. PacifiCorp is a private owed company, so their cash flow statements are not publicly available. The discount cash flow method would not be good way to measure the company’s value. The valuation multiple method is used because statistics from comparable companies are available. A disadvantage to this method would be if the comparable companies within that industry are mispriced. Another question raised about the range could be that...
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...Shehzad Chowdhury Don Taylor Seminar: Issues in Corp Finance 01/31/2015 Warren Buffet Case This case study talks about Warren Buffets’s Berkshire Hathaway company; initially, it discuses regarding the possible meaning of the alters in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement is for the reason to the truth that the deal formed value for both consumers and suppliers; In addition, Berkshire was extra expanded subsequent to the acquisition. The $2.55 billion gain in Berkshire’s market value of equity oblique that the basic value of PacifiCorp was fine since it cut down within the range of challengers supported on the subsequent result, which is $2.55 billion divided by 312 and 312 again divided by 18 million gives $8.17.Next, Berkshire is keen to give this premium for every share of PacifiCorp 5.1 billion divided by 312.18 million that results $16.30 per share of PacifiCorp $8.17 plus 16.30 equals $24.47. Later, we discover the range of likely values for PacifiCorp in Exhibit 10 as follows: Revenue median of $6.252 Billion, average of $6.584 Billion, EBIT median of $8.775 Billion, average of $9.289 Billion, EBITDA median of $9.023 Billion, average of $9.076 Billion, Net Income median of $7.596 Billion, average of $7.553 Billion, EPS median of $4.277 Billion, and a mean of $4.308 Billion and Book value median of $5.904 Billion, mean of $5.678 Billion. The Question about income; the implied worth of PacifiCorp is giving...
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...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 $2.17 billion.1 Scottish Power’s share price also jumped 6.28% on the news2; the S&P 500 Composite Index closed up 0.02%. Exhibit 1 illustrates the recent share-price performance for Berkshire Hathaway, Scottish Power, and the S&P 500 Index. The acquisition of PacifiCorp renewed public interest in its sponsor, Warren Buffett. In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $44 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 for Berkshire Hathaway of 24% from 1965 to 2004),3 Berkshire paid him only $100,000 per year to serve as its CEO. While Buffett and other insiders controlled 41.8% of Berkshire Hathaway, he ran the company in the interests of all shareholders...
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...Bradford KilshawFIN 3717Shan He Warren E. Buffett, 2005 On May 24, 2005, CEO of Berkshire Hathaway Inc., Warren Buffet, stated that one of the company's subsidiaries, MidAmerican Energy Holdings Company, acquired the electric utility PacifiCorp. MidAmerican bought PacifiCorp from its parent company, Scottish Power plc, for $5.1 billion cash and $4.3 billion in preferred stock and liabilities. This acquisition was the second largest of Buffet's career and his largest since 1998. Warren Buffet has long been viewed as one of the most savvy investors in the world. With an estimated net worth of $44 billion, he is one of the richest men walking the planet. Public interest in Buffet rose highly again with the large scale purchase of PacifiCorp. While at Columbia University, Warren Buffet studied under Benjamin Graham, noted for developing a method for identifying undervalued stocks. His method focussed on the value of assets like cash, net working capital and physical assets, and ultimately, Buffet modified it to focus on valuable franchises going unrecognized in the market as well. Buffet's investing strategy includes several different philosophies. Some approaches he uses include: economic reality, the cost of lost opportunity, value creation, risk and discount rates, diversification, investing behavior driven by information, analysis, and self-discipline, setting emotion aside, alignment of agents and owners, and measuring performance based on intrinsic value instead of profits...
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...1. Be prepared to discuss each aspect of Warren Buffet's investment philosophy. Do you agree or disagree? A basis in financial theory is preferred but not required tomorrow. Berkshire should continue its strategy based on Buffett's investment philosophy of purchasing undervalued assets. Over the past 40 years, Berkshire has increased shareholder value by an average of 21%, twice the average of the S&P 500 over the same period. Berkshire has a time tested set of rules for the best types of companies to acquire, namely to purchase businesses for less than they are worth. Berkshire must continue this strategy in order to increase shareholder wealth. Specifically, Buffett must use his investment philosophy that has made him so successful. He should continue to seek companies to invest or purchase that he understands and can purchase at a discount. The economic slowdown is an opportunity for Berkshire to find undervalued assets. Within the U.S. Buffett could look at the financial industry. He could also look at purchasing assets in a few years when the housing industry recovers. Given Buffett's investment philosophy, this would be an ideal time to purchase undervalued assets and hold them for a long time. Buffett should also be looking outside of the U.S. for investment opportunities. Brazil, India, Europe, and China are all opportunities. China's stock market is down significantly this year. This may be an excellent time for Buffett to search for bargains. Buffett...
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...gerry JoHnson KeVan sCHoles rICHard WHIttIngton Fundamentals oF strategy ACCESS CODE INSIDE unlock valuable online learning resources Once opened this pack cannot be returned for a refund Welcome to FUNDAMENTALS OF STRATEGY Strategy is a fascinating subject. It’s about the overall direction of all kinds of organisations, from multinationals to entrepreneurial start-ups, from charities to government agencies, and many more. Strategy raises the big questions about these organisations – how they grow, how they innovate and how they change. As a manager of today or of tomorrow, you will be involved in influencing, implementing or communicating these strategies. Our aim in writing Fundamentals of Strategy is to give you a clear understanding of the fundamental issues and techniques of strategy, and to help you get a great final result in your course. Here’s how you might make the most of the text: ● Focus your time and attention on the fundamental areas of strategy in just 10 carefully selected chapters. Read the illustrations and the case examples to clarify your understanding of how the concepts of strategy translate into an easily recognisable, real-world context. Follow up on the recommended readings at the end of each chapter. They’re specially selected as accessible and valuable sources that will enhance your learning and give you an extra edge in your course work. KEY CONCEPT AUDIO SUMMARY ● ● Also, look out for the Key Concepts and Audio Summary icons...
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...Financial Accounting for Decision Makers Visit the Financial Accounting for Decision Makers, sixth edition Companion Website at www.pearsoned.co.uk/atrillmclaney to find valuable student learning material including: G G G G G Self assessment questions to test your learning A study guide to aid self-learning Revision questions and exercises to help you check your understanding Extensive links to valuable resources on the web Comments on case studies to aid interpretative and analytical skills We work with leading authors to develop the strongest educational materials in accounting, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high-quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk 6th Edition Financial Accounting for Decision Makers Peter Atrill and Eddie McLaney Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Second edition published 1999 by Prentice Hall Europe Third edition published 2002 by Pearson Education Limited Fourth edition 2005 Fifth edition 2008 Sixth edition 2011 © Prentice Hall Europe...
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...3 Industry Analysis: The Fundamentals When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of...
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...oVeRVieW tesco around the world Creating value for customers across all our businesses UK Revenue* £40,766m Number of stores Us Revenue* 2,715 Employees £495m Number of stores 293,676 Selling space (sq ft, % of Group) 164 Employees 4,134 Selling space (sq ft, % of Group) 36.7m sq ft 35.4% 1.7m sq ft 1.6% tesco Bank Revenue* £919m Employee figures represent the average number of employees during the year ± 230 employees across asia and Europe work in locations other than those listed Employees * Revenues are sales excluding vaT and exclude the impact of iFRiC 13 (customer loyalty schemes) † Revenue for Europe includes France; revenue for asia includes india 1,274 GDP growth: Economist intelligence unit europe Revenue*† Revenue* (£m) Stores GDP growth Employees (% real change pa) £9,192m Number of stores 1,082 Employees± Republic of ireland Poland Hungary Czech Republic slovakia turkey 2,332 2,156 1,649 1,355 996 700 130 371 205 158 97 121 13,344 24,932 21,157 12,812 9,105 8,038 -0.8 3.8 1.2 2.3 4.0 8.1 89,559 Selling space (sq ft, % of Group) 30.2m sq ft 29.2% asia Revenue*† £10,278m Number of stores 1,419 Employees± india in india, we have an exclusive franchise agreement with Trent, the retail arm of the Tata Group. we are supporting the development of their Star Bazaar format. 104,071 Selling space (sq ft, % of Group) 35.0m sq ft 33.8% Revenue*...
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...3 Industry Analysis: The Fundamentals When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of...
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