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WARREN E. BUFFETT, 1995

On August 25, 1995, Warren Buffett, the chief executive officer (CEO) of Berkshire Hathaway, announced that his firm would acquire the 49.6% of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26% premium that Berkshire Hathaway would pay, particularly as Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hathaway’s shares closed up 2.4% for the day, for a gain in market value of $718 million.1 That same day, the S&P 500 Index closed up 0.5%. The acquisition of GEICO renewed public interest in its architect, Warren E. Buffett. In many ways, he was an anomaly. One of the richest individuals in the world with an estimated net worth of about $7 billion, he was also respected and even beloved. Although he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28% from 1965 to 1994),2 Berkshire Hathaway paid him only $100,000 per year to serve as its CEO. Buffett and other insiders controlled 47.9% of the company, yet he ran the company in the interests of all shareholders. He was the subject of numerous laudatory articles and three biographies,3 yet he remained an intensely private individual. Though acclaimed by many as an intellectual genius, he shunned the company of intellectuals and preferred to affect the manner of a down-home Nebraskan (he lived in Omaha), and a tough-minded investor. In contrast to investing’s other “stars,” Buffett acknowledged his investment failures both quickly and publicly. He held an MBA from Columbia University and credited his mentor, Professor Benjamin Graham, with developing the philosophy of value-based investing that guided him to his success. Buffett chided business schools for the irrelevance of their finance and investing theories.

1

The change in Berkshire Hathaway’s share price at the date of the announcement was $609.60. The company had outstanding 1,177,750 shares.
2
Buffett’s initial cost per share in Berkshire Hathaway in 1965 was about $17.578. On August 25, 1995, the price per share closed at $25,400.
3
Robert G. Hagstrom Jr., The Warren Buffett Way (New York, NY: John Wiley & Sons, 1994); Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Birmingham, AL: AKPE, 1994); Roger Lowenstein, Buffett: The Making of an American Capitalist (New York, NY: Random House, 1995).

This case was prepared by Professor Robert F. Bruner as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 1996 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 12/01.

This document is authorized for use only in Financial Management MIB by Wang at Hult International Business School - Boston from January 2013 to July 2013.

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UVA-F-1160

Numerous writers sought to distill the essence of Buffett’s success. What were the key principles that guided him? Could those principals be applied broadly in the late 1990s and into the 21st century, or were they unique to Buffett and his time? From an understanding of those principles, analysts hoped to illuminate Berkshire Hathaway’s acquisition of GEICO. Under what assumptions would the acquisition make sense? What were Buffett’s probable motives in the acquisition? Would the acquisition of GEICO prove to be a success? How would...
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