According to the case, there are stock price changes for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement. Also, the bid price for PacifiCorp is $9.4 billion. After knowing this announcement, Berkshire Hathaway’s Class A shares price went up and make them gained in market value $2.17 billion. In Berkshire and other investors’ point of view, After Berkshire takeover PacifiCorp, it might have a good development and future so that the stock price went up. Berkshire believed that PacifiCorp can have good earning returns in the future. The intrinsic value is more valuable than its cost so they are willing to pay $9.4 billion to acquire.
Moreover, based on the multiples for comparable regulated utilities, we can see that in exhibit 10, the range of possible enterprise values for PacifiCorp is form $6.252 billion to $9.289 billion. And the range of possible market value of equity is $4.277 billion to $5.904 billion. In this case, Berkshire used $9.4 billion to acquire the electric utility PacifiCorp. This price is out of the range neither of possible enterprise value nor of possible market value. So, a very obvious question is raised here----why Berkshire was willing to purchase PacifiCorp at such high price? In the article, Buffett mentioned “intrinsic value is all important and is the only logical way to evaluate the relative attractiveness of investment and business.” That means Buffett make purchases at the price below or equals the intrinsic value. And we all know market value is the price at which an asset would trade in a competitive auction setting. At the point of possible market value, this bid price is much higher than the market given. The question here is how Buffett can know the intrinsic value of PacifiCorp is worth that much when the market possible highest price is just $5.904 billion. On the other hand, enterprise value is a measure of a company's value, often used as an alternative to straightforward market capitalization. Since the bid price is over the possible highest price of enterprise value, does it mean PacifiCorp still hiding some undiscovered value form the market?
So, whether the bid price and the intrinsic value of PacifiCorp are the same? We know that from the case the bid for PacifiCorp is a little bit expensive since it is over the range of possible value. For compare with the intrinsic value, we might use the U.S 30 year treasury rate (U.S 30 year treasury rate=4.6%) and let Net income be the following cash flow to perform a simple discounted cash flow analysis, we find that PV =7553(1+4.6%)+7553(1+4.6%)2+…..+7553(1+4.6%)∞
is greater than the bid price.
After Buffett acquired Berkshire Hathaway in 1965, Berkshire Hathaway grew from $102 to $85,500, which has an annual increase of 24% since 1965. And it has decline due to technology change and inflation, it becomes better after closing textile side of their business. Also, Scottish Power has outperformed the S&P 500 Index from March to May2005, but Berkshire Hathaway is below S&P 500 Index. That’s attracted Berkshire to purchase PacifiCorp. Thus, it should be a good investment for Buffet ince they raise their voting interest from 9.7% to 9.9% and 76% to 83.7% of economic interest in equity of MidAmerican in 2002. They can have major stake in company without violating utility laws. But they should have more profit investment because the net earning has decrease from 416million in 2003 to 170million in 2004.
Berkshire’s investment in the “Big Four” which include: American Express, Coca-Cola, Gillette, and Wells Fargo. Berkshire invested $3.83 billion through multiple transactions for 12.5 years on a weighted basis. Looking at the numbers of the "Big Four", each company created more value than the market. The value of the investment was $24.681 billion, which gain for $20.849 billions. So it should be very successful investments.
From Warren Buffett’s...