Warren E. Buffett, 2005
Warren E. Buffett is one of the world's richest men with a net worth estimated at $44 billion by Forbes magazine. Buffett is known for his patient approach to investing and making long-term investments in steady, predictable industries that generate positive cash flow. It was announced that MidAmerican would purchase the regulated electric utility PacifiCorp from Scottish Power, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. This would be the second largest purchase of his career. After the announcement, stock prices for both PacifiCorp and Berkshire Hathaway increased, by 2.4% and 6.28% respectfully, which suggests market approval for the acquisition of PacifiCorp.
From the increase in stock price, we can assume that investors believe that the deal was a fair price and that acquiring PacifiCorp was a good investment to benefit Berkshire Hathaway. In fact the market added more value enhancement to Scottish Power than Berkshire, which leads investors to consider why Scottish Power gained more benefit than Berkshire Hathaway and if Berkshire Hathaway paid a reasonable price.
From Exhibit A, on the following page, we can analyze the range of values for PacifiCorp. From this we can see that the only significant various between median and mean value arises in EBIT, which indicates outliers for revenues, operating expenses, or depreciation. Intrinsic value refers to the actual value of a company or stock without reference to its market value and is calculated through the discounted cash flow of a business during its remaining life. Intrinsic value can also encapsulate how well the company is run, cash flow, and management competency. According to Buffett, intrinsic value indicates the “present value of the future expected performance” and can be predicted through calculating the discounted cash flow of a business for its remaining life. This estimate allows...
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