Warren E. Buffett Case
Case Study 2: Warren E. Buffett, 1995
This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.
On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since 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 percent for the day, for a gain in market value of $718 million.1 That day, the Standard & Poor’s 500 index closed up 0.5 percent.
The acquisition of GEICO renewed public interest in its architect, Warren 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. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28 percent 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 percent of the company, yet Buffett 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 other investment ‘stars,’ Buffett acknowledged his investment failures quickly and publicly.
This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation.
On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since 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 percent for the day, for a gain in market value of $718 million.1 That day, the Standard & Poor’s 500 index closed up 0.5 percent.
The acquisition of GEICO renewed public interest in its architect, Warren 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. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth of 28 percent 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 percent of the company, yet Buffett 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 other investment ‘stars,’ Buffett acknowledged his investment failures quickly and publicly.
References: 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. 4 Reported in Stocks, Bonds, Bills, and Inflation, 1994 (Chicago: lbbotson Associates), p. 10. 5 Berkshire Hathaway, Inc., annual report, 1994, p. 6. 10 Reported in Stocks, Bonds, Bills, and Inflation, 1994. 11 Berkshire Hathaway, Inc., annual report, 1994, p. 2. 12 Berkshire Hathaway, Inc., annual report, 1992, p. 14. 13 Berkshire Hathaway, Inc., annual report, 1994, p. 7. 15 The yield on the 30-year U.S. Treasury bond on August 25, 1995, was 6.86 percent. The beta of Berkshire Hathaway was 0.95. 16 Quoted in Jim Rasmussen, ‘Buffett Talks Strategy with Students,’ Omaha World-Herald, January 2, 1994, p. 26. 17 Berkshire Hathaway annual report, 1993, and republished in Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Birmingham: AKPE, 1994), p. 574. 18 Quoted in Forbes, October 19, 1993, and republished in Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett, p. 574. 19 Quoted in Michael Lewis, Liar’s Poker (New York: Norton, 1989), p. 35. 20 Originally published in Berkshire Hathaway, Inc., annual report, 1987. This quotation was paraphrased from James Grant, Minding Mr. Market (New York: Times Books, 1993), p. xxi. 21 Peter Lynch, One Up on Wall Street (New York: Penguin Books, 1990), p. 78. 22 Berkshire Hathaway, Inc., annual report, 1986, p. 16. 23 Berkshire Hathaway, Inc., annual report, 1990, p. 15. 24 Berkshire Hathaway, Inc., Letters to Shareholders, 1977–1983, p. 53. 26 Quoted in L.J. Davis, ‘Buffett Takes Stock,’ New York Times, April 1, 1990, p. 16. 27 Quoted in Forbes, October 19, 1993, and republished in Kilpatrick, Of Permanent Value, p. 574. 28 ‘Owner-Related Business Principles’ in Berkshire Hathaway, Inc., annual report, 1994, p. 3. 30 Reported in Stocks, Bonds, Bills, and Inflation, 1994, p. 10. 33 Quoted in Garth Alexander, ‘Buffett Spends $2bn on Return to His Roots,’ Times Newspapers Ltd., August 17, 1995. Source: Berkshire Hathaway, Inc., annual report, 1994.