Week 1 Buffet Case
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
$2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of
PacifiCorp?
Berkshire purchased PacificCorp for $5.1B cash and $4.3B in liabilities and preferred stock, a transaction valued at $9.4b. On the day of the announcement, both Berkshire and Scottish
Power stocks jumped. The market seemingly reacted positively to the purchase and essentially approving the acquisition. The purchase created additional value for both firms, shown in the
$2.55b market gain that day. The purchase also increased the diversification of Berkshire by entering into a market previously not included in their extensive portfolio. The reputation of
Warren Buffett may have also played into the sudden increase in market value.
The average Price Per Share Berkshire paid was the cash value of $5.1 billion/312.18 million shares outstanding = $16.33
The $2.55 billion in Berkshires equity gain = $2.55 billion/312.18 million = $8.17
$16.33 + $8.17 = $24.50
Berkshire paid approximately $24.50 per share, which was within the range of the other energy firms in exhibit 9 on page 21. The lowest price per share was $22.70 and the highest was
$42.60. The $24.50 was closer to NSTAR, who had an EBITA 25% lower than PacificCorp. Cinergy
Corp. had a similar financial portfolio and a price per share between $34.90 and $42.60. Even if you were to calculate the additional $4.3B in liabilities and stock Berkshire purchased, that would add an additional $13.77 to the pps, the total Berkshire would have paid was $38.27 per share, completely in line with Cinergy Corp. at that time.
2.
Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
Exhibit 9 does not show a dividend per share calculation, so
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
$2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of
PacifiCorp?
Berkshire purchased PacificCorp for $5.1B cash and $4.3B in liabilities and preferred stock, a transaction valued at $9.4b. On the day of the announcement, both Berkshire and Scottish
Power stocks jumped. The market seemingly reacted positively to the purchase and essentially approving the acquisition. The purchase created additional value for both firms, shown in the
$2.55b market gain that day. The purchase also increased the diversification of Berkshire by entering into a market previously not included in their extensive portfolio. The reputation of
Warren Buffett may have also played into the sudden increase in market value.
The average Price Per Share Berkshire paid was the cash value of $5.1 billion/312.18 million shares outstanding = $16.33
The $2.55 billion in Berkshires equity gain = $2.55 billion/312.18 million = $8.17
$16.33 + $8.17 = $24.50
Berkshire paid approximately $24.50 per share, which was within the range of the other energy firms in exhibit 9 on page 21. The lowest price per share was $22.70 and the highest was
$42.60. The $24.50 was closer to NSTAR, who had an EBITA 25% lower than PacificCorp. Cinergy
Corp. had a similar financial portfolio and a price per share between $34.90 and $42.60. Even if you were to calculate the additional $4.3B in liabilities and stock Berkshire purchased, that would add an additional $13.77 to the pps, the total Berkshire would have paid was $38.27 per share, completely in line with Cinergy Corp. at that time.
2.
Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
Exhibit 9 does not show a dividend per share calculation, so