Case 1: Warren Buffet
Berkshire Hathaway Inc. is a famous company which also involves in many different business segments. It was originally operated as a cotton manufacturing company. In 1965, Warren Buffet declared to take over it and he became the chairman and CEO of Berkshire Hathaway. Since then, this company started to be well known by the world.
Market value implication
On May 24, 2005, Buffet announced that MidAmerican Energy Holding Company, a subsidiary of Berkshire Hathaway would acquire PacifiCorp which is an electric utility company. He decided to use $5.1 billion in cash and $4.3 billion in liabilities and preferred stock to acquire it. According to the data, on the day of announcement, Berkshire Hathaway’s Class A shares closed up 2.4% for the day and reached $2,010 per share, for a gain in market value of $2.55 billion. It implies that market showed a promising attitude towards this acquisition. Since Buffet is a well-known and successful investor, people will trust his decision in investment. They believed this acquisition would generate more profits for them. Scottish Power’s share price jumped 6.28% and It implies that people also consider PacifiCorp could be more profitable and provide better service to citizens under the acquisition by MidAmerican. The intrinsic value of PacifiCorp could be calculated as $24.51 per share. The calculation process is shown in Table 1, Compared with the competitors like other energy firms, PacifiCorp’s intrinsic value is reasonable.
Analysis of PacifiCorp value
The case also uses valuation multiples to figure out the value for PacifiCorp in a quick way and presents detailed information in Exhibit 10. To see in a direct way, we list the ranges of possible values in Table 2. Compared with the purchase price of $9.4 billion offered by MidAmerican, the market value of equity part of PacifiCorp is much smaller; what makes Buffett decided such attractive price? Does he definitely sure this acquisition...
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