Warren E. Buffett 2005
FINA5010W Financial Management
Case Study Report– Warren E. Buffett, 2005
Ankie Wong Benny Cheng Christine Wai Chris Tam Jacky Chan Veronica Chang
1155008805 1155006903 1002549534 1005140000 1155006899 1155008802
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In this case study, we attempt to study an investment Guru, Mr. Warren E. Buffett, through (1) evaluating his 2 major investments - acquisition of PacifiCorp. in 2005 and the ‘Big Four’ (2) investigation and critical analysis of his 8 major investment philosophies and other important ideas such as intrinsic value, valuation of stocks and time value of money. I. Acquisition of PacifiCorp..
On May 24, 2005, it was announced that MidAmercian Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire a private energy company, PacifiCorp., whose parent,
Scottish Power, is a listed energy company PacifiCorp.. Berkshire has utilized $5.1 billion in cash, which will be paid after 1 year, together with further liabilities to complete the acquisition. The market responded very positively on the same day. As illustrated in figure 1, Berkshire’s stock price has been increased by 2.4%, which PacifiCorp.’s parent, Scottish Power’s by 6.28% and S&P 500 closed up 0.02%. We believe there are 4 possible reasons for such a response: a) Psychological factor- The general public believed Buffett is an investment guru rather than rationally studying market information of the acquisition. b) Higher Return on Equity (ROE) ratio of Scottish Power (PacifiCorp.) than Berkshire (7.5% vs. 5.7%) c) Outperformed stock price of Scottish Power (PacifiCorp.) than the market while Berkshire was underperformed.
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d) More diversified investment portfolio of Berkshire after the acquisition was expected to provide more stable returns. Before the acquisition, Berkshire did not have significant investment in energy sector. Using Intrinsic Value concept to evaluate the acquisition The positive market response had provided Berkshire a gain of $2.55 billion in
Case Study Report– Warren E. Buffett, 2005
Ankie Wong Benny Cheng Christine Wai Chris Tam Jacky Chan Veronica Chang
1155008805 1155006903 1002549534 1005140000 1155006899 1155008802
1
In this case study, we attempt to study an investment Guru, Mr. Warren E. Buffett, through (1) evaluating his 2 major investments - acquisition of PacifiCorp. in 2005 and the ‘Big Four’ (2) investigation and critical analysis of his 8 major investment philosophies and other important ideas such as intrinsic value, valuation of stocks and time value of money. I. Acquisition of PacifiCorp..
On May 24, 2005, it was announced that MidAmercian Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire a private energy company, PacifiCorp., whose parent,
Scottish Power, is a listed energy company PacifiCorp.. Berkshire has utilized $5.1 billion in cash, which will be paid after 1 year, together with further liabilities to complete the acquisition. The market responded very positively on the same day. As illustrated in figure 1, Berkshire’s stock price has been increased by 2.4%, which PacifiCorp.’s parent, Scottish Power’s by 6.28% and S&P 500 closed up 0.02%. We believe there are 4 possible reasons for such a response: a) Psychological factor- The general public believed Buffett is an investment guru rather than rationally studying market information of the acquisition. b) Higher Return on Equity (ROE) ratio of Scottish Power (PacifiCorp.) than Berkshire (7.5% vs. 5.7%) c) Outperformed stock price of Scottish Power (PacifiCorp.) than the market while Berkshire was underperformed.
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d) More diversified investment portfolio of Berkshire after the acquisition was expected to provide more stable returns. Before the acquisition, Berkshire did not have significant investment in energy sector. Using Intrinsic Value concept to evaluate the acquisition The positive market response had provided Berkshire a gain of $2.55 billion in