Pacificorp Case
Warren Buffet made a very promising choice to purchase PacifiCorp back in 2005 according to my investment analysis.
Financial Health of PacifiCorp Initially, when analyzing PacifiCorp’s financials alone, one would assume that Warren Buffet made an overly optimistic decision (Exhibit 1); however, when comparing the financial leverage and return on assets to other companies within the same industry, one can see that PacifiCorp did not perform poorly on average (Exhibit 2). Just judging PacifiCorp alone, investors would assume that PacifiCorp did not have good short term financial strength, PacifiCorp may have had problems meeting their short-term obligations, are aggressive in financing their growth with debt, and profitability seemed very …show more content…
poor since current ratios for a healthy business are within the range of 1.5 and 3. PacifiCorp only had a current ratio averaging about .73. But, looking at Exhibit 2, one can see that PacifiCorp met the average in financing their assets with debt as well as their return on assets. After determining the financial health of PacifiCorp, everything now boils down to whether or not Warren Buffet’ valuation was a sound decision.
Valuation of PacifiCorp Warren Buffet made a reasonable evaluation of the profitability of PacifiCorp. The first thing I did was compare the total price of the deal to the assets of the company. In doing so, I would then find the intrinsic value and determine whether or not the price was right. I came about calculating this amount by doing the following… Warren Buffet purchased PacifiCorp for approximately $5.1 billion and assumed approximately $4.3 billion in debt (Exhibit 3). In total, Warren Buffet is buying for approximately 9.4 billion dollars. In 2004 and 2005, PacifiCorp had approximately 3.3 and 3.4 billion of Assets minus Liabilities respectively.
Exhibit 1 Analysis of PacifiCorp 's Consolidated Financial Statements
Year Ended March 31… 2004 2005 Average
Current Assets $ 756.40 $ 1,214.30 $ 985.35
Current Liability $ 1,074.30 $ 1,597.70 $ 1,336.00
Net Income $ 248.10 $ 251.70 $ 249.90
Total Debt $ 8,357.10 $ 9,143.80 $ 8,750.45
Total Assets $ 11,677.10 $ 12,520.90 $ 12,099.00
Long-Term Debt $ 3,520.20 $ 3,629.00 $ 3,574.60
Total Shareholders’ Equity $ 3,320.00 $ 3,377.10 $ 3,348.55 Analysis on PacifiCorp Ratios 2004 2005 Average
Current Ratio 0.70 0.76 0.73
Total Debt to Asset Ratio 0.72 0.73 0.72
Long-Term Debt to Asset Ratio 0.30 0.29 0.30
Total Debt to Equity Ratio 2.52 2.71 2.61
Equity Multiplier 3.52 3.71 3.61
Return on Assets 0.02 0.02 0.02
Return on Equity 0.07 0.07 …show more content…
0.07
Exhibit 2 Financial Leverage Analysis of PacifiCorp and Companies within the Same Industry PacifiCorp 2004 PacifiCorp 2005 Alliant Energy Corp Cinergy Corp NSTAR SCANA Corp Wisconsin Energy Corp Average
Total Debt to Asset Ratio 0.72 0.73 0.66 0.72 0.79 0.71 0.74 0.72
Long-Term Debt to Asset Ratio 0.30 0.29 0.28 0.28 0.30 0.35 0.34 0.31
Return on Assets Analysis PacifiCorp vs.
Other Companies in the Same Industry PacifiCorp 2004 PacifiCorp 2005 Alliant Energy Corp Cinergy Corp NSTAR SCANA Corp Wisconsin Energy Corp Average
Return on Assets 0.02 0.02 0.02 0.03 0.03 0.03 0.03 0.03
Exhibit 3
News from NBC.COM Associated Press
Updated 5/24/2005 5:21:31 PM ET
“SALT LAKE CITY — Striking the second biggest deal of his career and making a major move in the energy industry, billionaire investor Warren Buffett agreed Tuesday to pay $5.1 billion in cash to acquire Western states electric utility PacifiCorp.”
“MidAmerican will purchase Portland, Ore.-based PacifiCorp from ScottishPower PLC, which acquired the utility in 1999. In addition to the cash payment, MidAmerican will assume $4.3 billion in PacificCorp debt and preferred stock.” http://www.nbcnews.com/id/7962826/ns/business-us_business/t/buffett-buys-pacificorp-billion-cash/#.UkdRAoaThtk Exhibit 4
References:
New York Times http://www.nytimes.com/2005/05/25/business/25place.html?pagewanted=print&_r=0 SEC for Mid-American Energy Holding Co
http://www.sec.gov/Archives/edgar/data/1081316/000095013604000640/file001.htm
Financial Health of PacifiCorp Initially, when analyzing PacifiCorp’s financials alone, one would assume that Warren Buffet made an overly optimistic decision (Exhibit 1); however, when comparing the financial leverage and return on assets to other companies within the same industry, one can see that PacifiCorp did not perform poorly on average (Exhibit 2). Just judging PacifiCorp alone, investors would assume that PacifiCorp did not have good short term financial strength, PacifiCorp may have had problems meeting their short-term obligations, are aggressive in financing their growth with debt, and profitability seemed very …show more content…
poor since current ratios for a healthy business are within the range of 1.5 and 3. PacifiCorp only had a current ratio averaging about .73. But, looking at Exhibit 2, one can see that PacifiCorp met the average in financing their assets with debt as well as their return on assets. After determining the financial health of PacifiCorp, everything now boils down to whether or not Warren Buffet’ valuation was a sound decision.
Valuation of PacifiCorp Warren Buffet made a reasonable evaluation of the profitability of PacifiCorp. The first thing I did was compare the total price of the deal to the assets of the company. In doing so, I would then find the intrinsic value and determine whether or not the price was right. I came about calculating this amount by doing the following… Warren Buffet purchased PacifiCorp for approximately $5.1 billion and assumed approximately $4.3 billion in debt (Exhibit 3). In total, Warren Buffet is buying for approximately 9.4 billion dollars. In 2004 and 2005, PacifiCorp had approximately 3.3 and 3.4 billion of Assets minus Liabilities respectively.
Exhibit 1 Analysis of PacifiCorp 's Consolidated Financial Statements
Year Ended March 31… 2004 2005 Average
Current Assets $ 756.40 $ 1,214.30 $ 985.35
Current Liability $ 1,074.30 $ 1,597.70 $ 1,336.00
Net Income $ 248.10 $ 251.70 $ 249.90
Total Debt $ 8,357.10 $ 9,143.80 $ 8,750.45
Total Assets $ 11,677.10 $ 12,520.90 $ 12,099.00
Long-Term Debt $ 3,520.20 $ 3,629.00 $ 3,574.60
Total Shareholders’ Equity $ 3,320.00 $ 3,377.10 $ 3,348.55 Analysis on PacifiCorp Ratios 2004 2005 Average
Current Ratio 0.70 0.76 0.73
Total Debt to Asset Ratio 0.72 0.73 0.72
Long-Term Debt to Asset Ratio 0.30 0.29 0.30
Total Debt to Equity Ratio 2.52 2.71 2.61
Equity Multiplier 3.52 3.71 3.61
Return on Assets 0.02 0.02 0.02
Return on Equity 0.07 0.07 …show more content…
0.07
Exhibit 2 Financial Leverage Analysis of PacifiCorp and Companies within the Same Industry PacifiCorp 2004 PacifiCorp 2005 Alliant Energy Corp Cinergy Corp NSTAR SCANA Corp Wisconsin Energy Corp Average
Total Debt to Asset Ratio 0.72 0.73 0.66 0.72 0.79 0.71 0.74 0.72
Long-Term Debt to Asset Ratio 0.30 0.29 0.28 0.28 0.30 0.35 0.34 0.31
Return on Assets Analysis PacifiCorp vs.
Other Companies in the Same Industry PacifiCorp 2004 PacifiCorp 2005 Alliant Energy Corp Cinergy Corp NSTAR SCANA Corp Wisconsin Energy Corp Average
Return on Assets 0.02 0.02 0.02 0.03 0.03 0.03 0.03 0.03
Exhibit 3
News from NBC.COM Associated Press
Updated 5/24/2005 5:21:31 PM ET
“SALT LAKE CITY — Striking the second biggest deal of his career and making a major move in the energy industry, billionaire investor Warren Buffett agreed Tuesday to pay $5.1 billion in cash to acquire Western states electric utility PacifiCorp.”
“MidAmerican will purchase Portland, Ore.-based PacifiCorp from ScottishPower PLC, which acquired the utility in 1999. In addition to the cash payment, MidAmerican will assume $4.3 billion in PacificCorp debt and preferred stock.” http://www.nbcnews.com/id/7962826/ns/business-us_business/t/buffett-buys-pacificorp-billion-cash/#.UkdRAoaThtk Exhibit 4
References:
New York Times http://www.nytimes.com/2005/05/25/business/25place.html?pagewanted=print&_r=0 SEC for Mid-American Energy Holding Co
http://www.sec.gov/Archives/edgar/data/1081316/000095013604000640/file001.htm