...Introduction Berkshire Hathaway Inc. is a holding company worth $358.2 billion. Berkshire Hathaway Energy, Burlington Northern Santa Fe, LLC (BNSF), McLane Company, Service and retailing and financial products are some of the segments the company insures. They provide businesses with insurance and protection of property and casualty risk. Some of the important acquisitions Berkshire Hathaway has had in the 21st century include The Pampered Chef, Fruit of the Loom, and Larson-Juhl in 2002; Clayton Homes and McLane Company in 2003; Business Wire, Forest River, Medical Protective Company, Applied Underwriters, and PacifiCorp in 2005; TTI, ISCAR, Russell Corporation, and Equitas in 2006; shares of Wrigley and GE in 2008; Burlington Northern...
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...Regression Analysis of Verizon Communications, Berkshire Hathaway, and Wyndham Worldwide The stock market plays a pivotal role in the world today, bringing together investors with companies looking to raise funds. The government, organizations, and individual shareholder’s all have a stake in actively following and participating in the stock market. The problem that hinders common traders and professional investors alike becomes differentiating between the thousands of publicly traded companies in the U.S. alone to pick the best investments. By comparing three large, but very different companies to the market as a whole this paper will demonstrate how Beta can be used to measure the volatility of a stock. The three dependent variables will be acquired from historical stock returns from the communications conglomerate Verizon Communications (VC), Berkshire Hathaway Inc. (BRK-A) the multinational holding company best known its chairman Warren Buffet, and Wyndham Worldwide Corporation (WYN) one of the world’s largest hotel and resort chains. After comparing relevant statistical factors to each other a regression analysis will be done for each company comparing the excess market returns for each company (found by subtracting out the market free rate) to the market excess return. Table 1: Stock Return Statistics | Average Price/Share | Mean Return | Largest Gain | Largest Loss | Standard Deviation | Coefficient of Variation | VZ | $34.73 | 1.43% | 12.58% | -10...
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...acquisition of PacifiCorp increased Berkshire Hathaway’s intrinsic value. Background or Historical Perspective: Berkshire Hathaway was incorporated in 1889 as Berkshire Cotton Manufacturing and later merged with Hathaway manufacturing in 1955. In 1965, Warren Buffett and some partners gained control of Berkshire Hathaway. Buffett invested in companies from various sectors of the market ranging from insurance to clothing apparel. Over the next few decades since Buffett originally acquired Berkshire Hathaway, Buffett became famous as investment genius with an unbelievable growth percentage of 24%. Class A shares of Berkshire Hathaway traded at $102 in 1997 to $85,500 in 2005. Analysis and discussion: The stock price jump for both Berkshire Hathaway and Scottish Power plc means that investors are very optimistic about this move. The increase in Berkshire Hathaway’s market value of $2.55 billion means that the intrinsic value of PacifiCorp will add value to Berkshire Hathaway. The value of PacifiCorp ranges from $6.25 Billion to the $9.4 Billion paid to acquire PacifiCorp. The only aspect of this acquisition is why did Berkshire Hathaway pay so much for this acquisition? The only reason why Berkshire Hathaway would pay so much for an acquisition is that Buffett perceive PacifiCorp’s intrinsic value as more than $6.25 Billion. Berkshire Hathaway has performed extremely well with an annual growth percentage of 24%. By comparing Berkshire Hathaway’s Class A stock with the S&P...
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...company profile for Berkshire Hathaway. This profile will include a brief history of Berkshire Hathaway's humble beginnings as a textile manufacturer, and subsequent diversification into a successful powerhouse holdings company that has spread it's risk into a variety of industries. These industries include insurance, utilities, building materials, furniture, jewelry, apparel and food companies. This paper will examine Berkshire's recent financial situation over the last 5 years. while touching on the CEO compensation package. The CEO behind this conglomerate, Warren Buffet, is considered to be one of the greatest investors of the 20th Century. Since Buffet took over in 1965, with his 20% majority share of ownership, Berkshire Hathaway, has grown to include over 50 firms under the corporate name. For the last 36 years , "The Oracle of Omaha" as Warren Buffet is known, has lived by a simple philosophy to invest in strong managed companies that produced good products but were inherently undervalued in the market. (Hoover's, 2013) This paper will also discuss Berkshire's competition for their major industries. Company Profile Berkshire Hathaway Inc. is an American multinational conglomerate holding company that has subsidiaries in the manufacturing, retail, and service industries and most importantly reinsurance companies. The company itself was founded by Oliver Chase back in 1889 in New Bedford, MA, under the name Berkshire Cotton Manufacturing...
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...BERKSHIRE HATHAWAY PURCHASES GEICO WARREN BUFFET Executive Summary Berkshire Hathaway has made a bid for the remaining portion of GEICO stock. This report reviews the offer initiated by Warren Buffett. The details of this report include: • Valuation of GEICO stock. The $70 offer made by Warren Buffett and Berkshire Hathaway includes a 26% premium over the current GEICO stock price of $55.75. This report attempts to determine a range of appropriate stock prices for GEICO. Using the Gordon dividend discount model, along with historical dividend information and projections by Value Line, we estimate the value of GEICO stock in the range of $58 to $80. A review of historical growth rates in GEICO dividends also lends credibility to the investment’s future potential. • Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. • Buffett’s investment philosophy. A letter to shareholders gives us a unique look at Buffett’s considerations for investing. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. • Other issues. Buffett’s position on GEICO’s board of directors may shed light on the amount of information Buffett had about the future prospects of GEICO. At first...
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...Warren E. Buffett, 1995, Case Questions The purpose of this case is to introduce the themes that we will be covering in this course. In fact, if you look at Buffett’s investment philosophy (question 3 below) and compare it to the syllabus, you will find extensive overlap. 1. What is the possible meaning of the changes in the stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement? Specifically, what does the $718 million gain in Berkshire’s market value of equity imply about the intrinsic value of GEICO? (Note that Berkshire owned 33.25 million shares before the acquisition was announced.) Geico stock price will move up on the day of the acquisition announcement. Meant, GEICO intrinsic value also increase, total value will be more than $718 million in the market. 2. How well has Berkshire Hathaway performed? In the aggregate? In its investment in Scott & Fetzer? In its investment in earlier purchases of GEICO stock? Scott & Fetzer conservatively financed with Berkshire Hathaway. Buffett offered to buy the company for $315 million. Scott and Fetzer paid Berkshire Hathaway $125 million. Buffett noted that in terms of return on book value of equity, Scott & Fetzer would have easily beaten the Fortune 500 firms. 3. Please critically assess Buffett’s investment philosophy, and prepare to identify points where you agree and disagree with him. Graham’s approach was to focus on the value of assets, such as cash, net working...
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...The Hawks of Mass Street Hathaway Write Up Introduction Berkshire-Hathaway, conglomerate holdings company founded by Warren Buffet, may have a hidden connection to actress Anne Hathaway which was originally discovered by Dan Mervish of the Huffington Post. Mervish noticed six events, five movie premieres and one decoration (announcing the Oscars), all relating Hathaway to a positive daily performance by Buffet’s company. Mervish attempts to explain the trend that “automated, robotic trading programming are picking up the same chatter on the Internet about ‘Hathaway’ as the IMDb’s StarMeter, and they’re applying it to the stock market”. The following write-up tackles the issues and accuracy of Mervish’s accusation. Establishing a Database Using the original six events (movies and awards) we decided to expand the list to 28 total. Even though hosting the Oscars is not an award it is an honor and therefore we decided to use all movie honors in addition to movie openings. Starting in August 2004 with the opening of The Princess Diaries until 2013 her most recent release Don Jon (September 2013), we ran all daily data for BRK.A (Berkshire Hathaway.) Furthermore, award data was comprised for all ceremonies in which Anne won and was not just nominated. Note that movies and awards that opened/conducted over the weekend were not included in our data (i.e. Monday). Some award ceremonies were conducted in the evening; however, in order to stay concurrent with movie release data...
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...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...
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...1/28/13 Warren Buffett Case Analysis By analyzing the financial statements and Warren Buffett’s unique investment philosophy, the problem that must be answered is whether the acquisition of PacifiCorp increased Berkshire Hathaway’s intrinsic value. Buffett has a very unique way of measuring intrinsic value that would make it slightly more difficult to determine if this acquisition did, in fact, make Berkshire Hathaway more profitable. According to Warren Buffett, intrinsic value is “per-share progress”. Buffett assessed intrinsic value as the present value of future expected performance. For historical reference, Berkshire Hathaway has been outperforming the market since its inception in 1965. In 1977, the firm’s year-end closing share price was at $107. Fast-forward to May 24, 2005 and the closing price on BH’s 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 factors such as inflation, technological change, and competition from foreign competitors, but has come back strongly since it closed the textile side of its business operations. Most of this success can be attributed to Warren Buffett and his very unique investment philosophy that can be viewed very differently by many in the same field. According to the case, on the announcement day of the acquisition, Berkshire Hathaway class A shares closed 2.4%...
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...Berkshire Hathaway SWOT Analysis “SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the environmental Opportunities and Threats facing that firm. SWOT analysis is a widely used technique through which managers create a quick overview of a company’s strategic situation. The technique is based on the assumption that an effective strategy derives from a sound “fit” between a firm’s internal resources (strengths and weaknesses) and its external situation (opportunities and threats). A good fit maximizes a firm’s strengths and opportunities and minimizes its weaknesses and threats. Accurately applied, this simple assumption has powerful implications for the design of a successful strategy.” Berkshire Hathaway Berkshire Hathaway (Berkshire) is a holding company that engages in a number of diverse business activities through its subsidiaries. The group's business activities primarily comprise insurance and reinsurance operations. Additionally, the group is also engaged in non insurance businesses including building products, finance and financial products, flight services, retail, and apparel production. A strong capital position together with strong credit ratings enhances its bargaining power in the debt markets and gives it a competitive advantage. However, Europe's Solvency II project may put pressure on its profitability in Western Europe. Berkshire Hathaway | Parent Company | Berkshire Hathaway Inc. | Category...
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...Warren Buffett, 2005 Executive Summary On May 24, 2005, Berkshire Hathaway Inc. chief executive officer Warren Buffett announced the acquisition of PacifiCorp by MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., for about $9.4 billion in cash, liabilities, and preferred stock. The announcement led to a market value gain of $2.55 billion . Buffett was a well respected businessman with a successful investment philosophy. His philosophy included accounting with economic realty, acknowledging opportunity cost, assessing the time value of money, and scoring performance by intrinsic gain, along with other principles. Buffet was a believer in diversification; he helped Berkshire attain a diverse portfolio that included investments in insurance companies, apparel manufacturers, and grocery distributers. Though highly successful in the past, Buffett was frustrated after a few-year period that resulted in a lack of major investment by Berkshire Hathaway Inc. Rather than focus on investments that yielded short term gains, Buffett was waiting for an “elephant” investment opportunity to present itself. Buffett hoped to have found just that in the PacifiCorp acquisition. Problem Buffett badly wanted to make a significant gain for Berkshire Hathaway Inc. However, Buffett needed to consider if PacifiCorp was worth his cash offer of $5.1 billion. Should the investment be undertaken? Analysis As mentioned above, the announcement of the acquisition was met...
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...of $718 million. ------------------------------------------------- Question 2: GEICO Outstanding shares April 30, 1995: 67.89 million, of which 34.22 million owned and 33.67 million purchased at $70; total price $2.3 billion. A Capital Asset Pricing Model (CAPM) derived cost of equity equaled 10.99% percent via a risk-free rate of 6.86 percent, a beta of 0.75, and an equity risk premium of 5.5 percent. k = 6.86 + 0.75 ((5.5)) = 10.99% Using Value Line’s forecast & the above discount rate and share information: the following low end & high end NPV are calculated: Low end: -$335.57 High end: $389.89 For methodology in calculation of intrinsic value refer to ‘1995-Question 2’ in the accompanying “excel“spreadsheet for the analysis. Using Value lines cost of equity; the investment yields a negative Net Present Value (NPV) on the low end. The investment will not add value to the firm and the acquisition of GEICO doesn’t seem to be a good one. The high end range yields a positive NPV showing the investment rather is rather a prudent one. The discount rate used is highly subjective and is influenced by the risk premiums chosen by the analyst. If we increase the risk premium on the cost of equity we will see negative NPV for both the high and low end range; finding the investment unsuitable. Buffett calculated the intrinsic value using the risk free rate of 6.86%. Looking at “1995 excel spreadsheet”; using the risk free rate of 6.86%, both the high and low end ranges...
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...Shehzad Chowdhury Don Taylor Seminar: Issues in Corp Finance 01/31/2015 Warren Buffet Case This case study talks about Warren Buffets’s Berkshire Hathaway company; initially, it discuses regarding the possible meaning of the alters in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement is for the reason to the truth that the deal formed value for both consumers and suppliers; In addition, Berkshire was extra expanded subsequent to the acquisition. The $2.55 billion gain in Berkshire’s market value of equity oblique that the basic value of PacifiCorp was fine since it cut down within the range of challengers supported on the subsequent result, which is $2.55 billion divided by 312 and 312 again divided by 18 million gives $8.17.Next, Berkshire is keen to give this premium for every share of PacifiCorp 5.1 billion divided by 312.18 million that results $16.30 per share of PacifiCorp $8.17 plus 16.30 equals $24.47. Later, we discover the range of likely values for PacifiCorp in Exhibit 10 as follows: Revenue median of $6.252 Billion, average of $6.584 Billion, EBIT median of $8.775 Billion, average of $9.289 Billion, EBITDA median of $9.023 Billion, average of $9.076 Billion, Net Income median of $7.596 Billion, average of $7.553 Billion, EPS median of $4.277 Billion, and a mean of $4.308 Billion and Book value median of $5.904 Billion, mean of $5.678 Billion. The Question about income; the implied worth of PacifiCorp is giving...
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...Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa September 12, 2001 -1- White Paper: Examining Berkshire Hathaway’s 1995 Purchase of GEICO Insurance Tim Glowa Tim@Glowa.ca September 12, 2001 © 2001 Tim Glowa Berkshire Hathaway and GEICO Insurance © 2001 Tim Glowa September 12, 2001 -2- Table of contents Executive Summary.................................................................................................... 3 Introduction................................................................................................................. 4 Review of the case: Berkshire Hathaway purchasing GEICO.................................... 4 Strategic Outcome....................................................................................................... 7 Finance........................................................................................................................ 7 Time Value of Money................................................................................................. 8 Assessment of the GEICO purchase........................................................................... 8 Time value of money ................................................................................................ 11 An examination of the GEICO acquisition in hindsight........................................... 13 Limitations of Discounted Cash Flow .........................................................................
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...Warren Buffet I. Point of View Warren Buffet – CEO of Berkshire Hathaway II. Statement of the Problem Warren Buffet’s decision to acquire GEICO at a 26% premium compared to the market price. III. Objectives a. To be able to understand the issue of the case. b. To be able to come up with a recommendation to help the company’s decision. IV. Areas of Consideration * Buffett’s investment philosophy. Buffett’s considerations for investment give a unique outlook. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. * Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. * GEICO Corporation’s performance. * Geico had paid an increasing dividend each year. * Geico was the seventh largest auto insurer in the United States. * The firm was the lowest-cost insurance provider in the industry. * Geico’s share price had been hammered by double-digit inflation, higher accident rates, and high damage awards. V. Alternative Courses of Action 1. Accept: The acquisition of GEICO at a premium. Advantages: * It would encourage a positive public interest * It would create an increase in company’s value ...
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