Case 1 Warren E. Buffett, 2005 Assignment
Please make your answers as complete as possible by explaining/supporting the rationale for your position.
1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?
a. The possible meaning of the changes in stock price is due to the fact that the deal created value for both buyers and sellers; Berkshire was more diversified after the acquisition.
b. The $2.55 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good because it fell within the range of competitors based on the following calculations:
$2.55 billion / 312/18 million = $8.17 – Berkshire is willing to pay this premium for each share of PacifiCorp
5.1 billion / 312.18 million = $16.30 per share of PacifiCorp
$8.17 + 16.30 = $24.47 (see Exhibit 9)
2. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
a. We find the range of possible values for PacifiCorp in Exhibit 10.
i. Revenue median of $6.252 Billion, mean of $6.584 Billion.
ii. EBIT median of $8.775 Billion, mean of $9.289 Billion.
iii. EBITDA median of $9.023 Billion, mean of $9.076 Billion.
iv. Net Income median of $7.596 Billion, mean of $7.553 Billion.
v. EPS median of $4.277 Billion, and a mean of $4.308 Billion.
vi. Book value median of $5.904 Billion, mean of $5.678 Billion.
b. Question about revenue; The implied value of PacifiCorp is giving impractical results for range of revenue as compared to EBIT, EBITDA, & Net income (Expected: Revenue > EBITDA > EBIT > NI).
3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? As an alternative, the instructor could suggest that students perform a simple discounted cash-flow (DCF) analysis.
If you use CAPM for the simple DCF analysis: K=rf+B(rm-rt)
$5.1/(1+.0932)=$4.76 => it is in range of the rest of the comparable firms
4. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?
It has performed very well. Berkshire Hathaway has consistently outperformed the market since its inception in 1965. In 1977, the firm’s year end closing share price was $107; on May 24, 2005 the closing price on its Class A shares reached $85,500. Berkshire has had an annual increase of wealth of 24% since 1965, which is more than double the 10.5% of the average increase for other large stocks. It started out with a decline due to inflation, technological change, and intensifying competition from foreign competitors, but has recuperated well after closing the textile side of their business.
Berkshire Hathaway had recently been performing below S&P 500 Index according to Exhibit 1, from April 2005 to May 2005. Scottish Power had consistently outperformed the S&P 500 Index from March to May 2005. This probably was one aspect that attracted Berkshire to purchase PacifiCorp.
We believe that it was a good investment. In 2002 they owned 9.9% of the voting interest and 83.7% of the economic interest in the equity of MidAmerican. This allows them to have a major stake in the company without violating utility laws, which has proven to be successful for them. According to Exhibit 6, MidAmerican Holdings had a net earnings of 170 million in 2004, but compared to 2003 net earnings of 416 million,...
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