In May 2005 Warren Buffets’ Berkshire Hathaway’s subsidiary company MidAmerican Energy Holdings successfully took over the electrical utility company PacifiCorp. The company was purchased for $5.1 billion in cash plus debt assumption of $4.3 billion. The deal is the result of Buffet’s intense search, over several years to find an attractive acquisition. This case study evaluates the impact the acquisition has on the share price of both Berkshire Hathaway Ltd and Scottish Power. A valuation is conducted to assess whether the $5.1 billion dollars is a fair price. An analysis of Warren Buffet as a superior investor and how this contradicts finance theory and the semi strong form of efficiency. Then on a personal level the ethics and social responsibility underpinning Warren Buffet and his company will be expressed. a) Discuss what can be inferred from the changes in stock price for Berkshire Hathaway Ltd. and Scottish Power plc. on the announcement day of the acquisition? On the 24th of May the public announcement was made that Berkshire Hathaway Ltd, would take over Scottish Powers’ PacifiCorp, a significant effect resulted to the stock prices of both companies respectively. The stock price effect is visible in graph 1 & 2 showing the daily prices for May 2005 for both companies.
b) Assess the bid for PacifiCorp. Do you think the bid is a “fair” price? In assessing whether the bid price $5.1 billion dollar is a fair price a valuation of PacifiCorp must be conducted. The model that was implemented to perform the valuation was the DCF method. The value derived from this methodology was $ 5 119.348092 million dollars, rather astonishingly close to the bid price of MidAmerican. (The DCF model can be found in appendix) Therefore with a value so similar to that of the bid price, it can be ascertained that the bid reflects the company’s value thus is a fair price. CAPM =
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