Warren Buffet Case
Warren Buffet decided to buy Berkshire Hathaway in 1965, believing it can turn the financial decline around. Over the next 20 years, Buffet and his partners decided to invest in two insurance companies and get out of the textile business in which Berkshire originally started. Buffet decided to invest in many other companies besides just insurance. He decided to rebrand Berkshire as “ a holding company owning subsidiaries engaged in a number of diverse business activities.” The business in Berkshire’s portfolio included: Insurance, Apparel, Building products, Finance and financial products, Flight services, retail, grocery distribution, and Carpet and floor coverings. To invest in these companies, Buffet has come up with his own investment philosophy. His philosophy has 8 key elements: 1.Economic reality; not accounting reality.
2.The cost of the lost opportunity
4.Measure performance by gain in intrinsic value.
5.Risk and discount rates.
7.Invsting behavior should be driven by information, analysis, and self-discipline, not by emotion or “hunch’
8.Alignement of agents and owners.
When Berkshire first inquired PacifiCorp from Scottish Power plc in 2005, the stock price immediately rose for Berkshire and Scottish power. Berkshire gained a market value of $2.55 billion dollars. This means that the Return on Equity has immediately gone up for Berkshire. Buffet emphasizes intrinsic value more than once in his philosophy of investment. Stating that the intrinsic value of a company should be greater than the book value. On the first day of the acquisition, his intrinsic value has gone up which means that the value of the investment has swayed in his favor. When looking at PacifiCorp and the range of possible values based off other comparable energy firms, it seems that this investment would be a good move. They did some forecasting based off the median and mean. When using the median, the book value increases to $5,904 million as opposed $5,678 million when using the mean. That is a difference of 236 million dollars. Either way the investment seems to be strong one based of the market, but the difference in book value is extreme. I am wondering if PacifiCorp would fall into that category. Berkshire bought PacifiCorp for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. Your intrinsic value is your market value over divided by your book value. You want that to be greater than one to be a smart investment. You can figure that out by doing a discount back. The market value is $9.4 billion dollars. Buffet expects it to grow at 15%. So 5 years from now your future value will be $10.81 Billion. I think it will be a good move if they can keep the growth rate at 15%. Based off the exhibit 1. It looks lie Berkshire share price has been steadily declining since the acquirement of PacifiCorp, while Scottish Power has been increasing. Berkshire has been keeping up with the S & P 500 index, so it has not been doing too bad looking at it relatively. Exhibit 2 also shows that the revenues had increased dramatically, while earnings before tax declined, capital expenditures increased, depreciation increased, and identifiable assets have also increased. They seem to be doing well capital wise. Berkshire investment in the big four (American express, Coca-Cola, Gillette, and Wells Fargo) seemed to be a great investment in each category. He also diversified his investment well. Every investment he made seem to have quite an…