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Warren Buffet, 2005


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Warren Buffett, 2005

Executive Summary
On May 24, 2005, Berkshire Hathaway Inc. chief executive officer Warren Buffett announced the acquisition of PacifiCorp by MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., for about $9.4 billion in cash, liabilities, and preferred stock. The announcement led to a market value gain of $2.55 billion .
Buffett was a well respected businessman with a successful investment philosophy. His philosophy included accounting with economic realty, acknowledging opportunity cost, assessing the time value of money, and scoring performance by intrinsic gain, along with other principles. Buffet was a believer in diversification; he helped Berkshire attain a diverse portfolio that included investments in insurance companies, apparel manufacturers, and grocery distributers. Though highly successful in the past, Buffett was frustrated after a few-year period that resulted in a lack of major investment by Berkshire Hathaway Inc. Rather than focus on investments that yielded short term gains, Buffett was waiting for an “elephant” investment opportunity to present itself. Buffett hoped to have found just that in the PacifiCorp acquisition.

Buffett badly wanted to make a significant gain for Berkshire Hathaway Inc. However, Buffett needed to consider if PacifiCorp was worth his cash offer of $5.1 billion. Should the investment be undertaken?

As mentioned above, the announcement of the acquisition was met optimistically with a $2.55 billion market value gain. This can be considered a future cash flow, since it represents a future expected gain. Buffett stated in the case study that firm’s goal was to meet a 15% annual growth rate in intrinsic value; therefore, we can discount this cash flow with rate of 15%. The present value of the expected gain is $2.1675 billion. When added to Berkshire’s

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