Case 1: Warren E. Buffet, 2005
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?
The possible changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of acquisition announcement indicates the market approval for the acquisition and for both sellers value was created. Berkshire’s Class A shares price closed up 2.4% while Scottish Power’s shares jumped 6.28% and the S&P closed at 0.02% showing an overall approval. After the acquisition of Scottish Power plc class A shares reached $85,000.00, S&P 500 grew from 96 -1194. Buffet believed in his investment philosophy which created value to any business he obtained. Buffet created eight philosophies, these philosophies are; 1. Economic reality, not accounting reality.
2. The cost of the lost opportunity.
3. Value creation: time is money.
4. Measure performance by gain intrinsic value, not accounting profit. 5. Risk and discount rates.
6. Believed that investors should hold wide-range portfolio of stocks in order to shed company-specific risk. 7. Investing behavior should be driven by information. Information awareness is important for investing. 8. Alignment of agents and owners, treating his workers like family.
Buffet avoided risk and therefore used the risk-free discount rate. His firm also did not use debt financing and focus only on companies that had predictable stable earnings. Overall, Berkshire Hathaway was performing brilliantly and the Class A shares were amongst the highest shares on the New York Stock Exchange, partly because they had a split in stocks and dividends were never paid, retain corporate earnings.
The possible meaning of the changes in stock price is due to the fact that the deal created value for...
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