Warren Buffett Case Study
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 o Competitor’s Average Enterprise Value: $7.955 billion
• PacifiCorp Average Market Value from Multiples: $5.042 billion o Competitor’s Average Market Value: $4.551 billion
Recommendation
PacifiCorp is an excellent investment for Buffet and Berkshire
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 o Competitor’s Average Enterprise Value: $7.955 billion
• PacifiCorp Average Market Value from Multiples: $5.042 billion o Competitor’s Average Market Value: $4.551 billion
Recommendation
PacifiCorp is an excellent investment for Buffet and Berkshire