Berkshire Hathaway's Pacificorp Aqusitcion

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Warren E. Buffett, 2005
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? Answer: -


The possible meaning of the change of the stock is that the facts that are created in the deal had a positive effect on both the buyers ( BRK) and the sellers which are the mother company of Pacific( Scottish power),

To find the 2.55 Billion gain of BRK on the market value equity that the intrinsic value of Pacific was good because it was within the range demonstrated in the calculations I have done:- $2.55 billion / 312.8 million = $8.17 (Berkshire is willing to pay this premium for each share of PacifiCorp)

5.1 billion / 312.18 million = $16.30 per share of PacifiCorp

$8.17 + 16.30 = $24.47
(all information taken from chart 9)

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? Answer:- We find the range of possible values for PacifiCorp in chart 10:-

A. Revenue median of $6.252 Billion, mean of $6.584 Billion.

B. EBIT median of $8.775 Billion, mean of $9.289 Billion.

C- EBITDA median of $9.023 Billion, mean of $9.076 Billion.

D- Net Income median of $7.596 Billion, mean of $7.553 Billion.

E- EPS median of $4.277 Billion, and a mean of $4.308 Billion.

F- Book value median of $5.904 Billion, mean of $5.678 Billion.
The questions we may have on PacifiCorp is about the EBITDA and the NI comparing the value of them. 3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? Perform a discounted cash-flow (DCF) analysis of PacifiCorp.

Anwer :-
If you use CAPM for the simple DCF analysis: Return = rf +B (rm-rt)

rf=5.762        Return =5.762+.75(10.5-5.762)

B=.75            =9.32%=Discount rate


$5.1/(1+.0932)=$4.76 (it is in range of the rest of the comparable firms) 4. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?

BRK has performed very well.  BRK has always out preformed the market from its inception 1965.   In the year 1977 the stock was worth 107$ and in the 24 of may 2005 the stock was worth 85000$ as a Class A stock. BRK has a growth of 24% since the year 1965, which achieves more than the great stocks in the market that preform a range of 10.5%. BRK started out with a drop due to the statues of the inflation, technological change, and intensifying competition from foreign competitors, but has recuperated well after closing the textile side of their business.

BRK had recently been performing below S&P 500 Index according to chart 1, from April 2005 to May 2005. The outstanding performance of Scottish power comparing to the S&P 500 in the time between March to May 2005 attracted BRK to the acquiring PacifiCorp.

In my opinion I believe that it was a good investment.  After looking at the company that served over 5 Million customer, it lighted up in Warren buffet radar as a great investment so they stated in the year 2000 by acquiring 1.24 Billion dollars which was 9.7% of the voting interest and 76% of the economic interest in the equity of MidAmerican. In March 2004 BRK had another Acquiring of 6.7 Million shares that were as 9.9% and 83.7% economical interest.  This allows them to have a major stake in the company without violating utility laws, which has proven to be successful for them.  Demonstrated in chart 6, MidAmerican Holdings had net earnings of 170 million in 2004, but compared to 2003 net earnings of 416 million, MidAmerican had a net loss from 2003-2004. To push up the cash of NI they acquired PacifiCorp.

5. What is your assessment of...
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