Case 1 Warren E. Buffett, 2005
The possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement means that the market either does or does not approve of the acquisition. Since the market value of the company goes up, that means there is a market approval for the acquisition and it has created value for the buyers and sellers.
I found all the ranges for the medians in Exhibit 10. Implied values for PacifiCorp’s enterprise value and market value of equity are derived using the median and mean multiples of the comparable firms. Revenue median = $6,252 to $6,584 billion
EBIT = $8,775 to $9,289 billion
EBITDA = $9,023 to $9,076 billion
Net Income = $7,596 to $7,553 billion
EPS = $4,277 to $4,308 billion
Book Value = $5,904 to $5,678 billion
PacifiCorp’s bid of $5.1 billion in cash and 4.3 billion in liabilities and preferred stock equals $9.4 billion which is out of range for the ranges written in question 2 above. $9.4 billion is higher than $9,289 billion. This means that Warren must think the intrinsic value of the company is higher than what the market value and book value. The present value is based of the Discounted Cash Flows model which is $4.76 billion.
E) Warren Buffett’s perspective of intrinsic value is “the present value of future expected performance.” It is all the future gains at the present value of time. It is accorded such importance because it allows Buffett to recognize businesses that are undervalued and is the only logical way to evaluate the relative attractiveness of investments and businesses. Buffett uses a DCF (discounted cash flow) method which is similar to NVP but discounted at today’s value. An alternative to intrinsic value would be to look at the company’s book value. Warren Buffett explains that book value is “meaningless as an indicator of intrinsic value.” In the case, he explains how a college degree’s...
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