...UVA-F-1483 Version 2.3 WARREN E. BUFFETT, 2005 On May 24, 2005, Warren E. Buffett, the chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. In Buffett’s largest deal since 1998, and the second largest of his entire career, MidAmerican would purchase PacifiCorp from its parent, Scottish Power plc, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. “The energy sector has long interested us, and this is the right fit,” Buffett said. At the announcement, Berkshire Hathaway’s Class A shares closed up 2.4% for the day, for a gain in market value of $2.17 billion.1 Scottish Power’s share price also jumped 6.28% on the news2; the S&P 500 Composite Index closed up 0.02%. Exhibit 1 illustrates the recent share-price performance for Berkshire Hathaway, Scottish Power, and the S&P 500 Index. The acquisition of PacifiCorp renewed public interest in its sponsor, Warren Buffett. In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $44 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 for Berkshire Hathaway of 24% from 1965 to 2004),3 Berkshire paid him only $100,000 per year to serve as its CEO. While Buffett and other insiders controlled...
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...Bradford KilshawFIN 3717Shan He Warren E. Buffett, 2005 On May 24, 2005, CEO of Berkshire Hathaway Inc., Warren Buffet, stated that one of the company's subsidiaries, MidAmerican Energy Holdings Company, acquired the electric utility PacifiCorp. MidAmerican bought PacifiCorp from its parent company, Scottish Power plc, for $5.1 billion cash and $4.3 billion in preferred stock and liabilities. This acquisition was the second largest of Buffet's career and his largest since 1998. Warren Buffet has long been viewed as one of the most savvy investors in the world. With an estimated net worth of $44 billion, he is one of the richest men walking the planet. Public interest in Buffet rose highly again with the large scale purchase of PacifiCorp. While at Columbia University, Warren Buffet studied under Benjamin Graham, noted for developing a method for identifying undervalued stocks. His method focussed on the value of assets like cash, net working capital and physical assets, and ultimately, Buffet modified it to focus on valuable franchises going unrecognized in the market as well. Buffet's investing strategy includes several different philosophies. Some approaches he uses include: economic reality, the cost of lost opportunity, value creation, risk and discount rates, diversification, investing behavior driven by information, analysis, and self-discipline, setting emotion aside, alignment of agents and owners, and measuring performance based on intrinsic value instead of profits...
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...Individual Assignment BERKSHIRE HATHAWAY Assignment Report Submitted by: Sudipt Tewari | G13051 | Case Summary: Berkshire Hathaway, Inc.’s chairman and CEO Warren Buffett, is the world's third richest man. He invested in Berkshire Hathaway in 1962, and by 1963, Buffett was Berkshire’s largest shareholder. Buffett started purchasing other businesses, which were primarily insurance companies, with profits from the declining original textile business. In 1985, the original textile business was shut down and Berkshire Hathaway diversified into higher margin businesses. Now, Berkshire Hathaway is active in a variety of sectors, including insurance, regulated utilities and retailing. One of the companies that Berkshire Hathaway holds is GIECO (Government Employees Insurance Company). In 1995, GIECO was wholly owned by Berkshire Hathaway. By 2005, its market share was increased from 1.9 percent to 6.1 percent with underwriting revenues of additional $590 million in cash from operating earnings in spite of decline in insurance industry. Another major company under Berkshire Hathaway is Nebraska Furniture Mart. It is a large furniture store, which holds NFM Mega Mart and Homemakers Furniture. Warren Buffett utilizes a constant strategy to manage these companies including Berkshire Hathaway by holding shares for a long time. Berkshire Hathaway does not pay any dividends to the shareholders but reinvests surplus instead to maximize the value of the company. Under this strategy...
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...Taylor Scott 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...
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...Warren Buffett and Gillette Background of the Active Investor Warren Buffett is known as one of the world’s most notable investors. He is a self-made investor, now worth billions of dollars. Buffets premise is that people should base their investing on common sense and search out assets that are selling for less than they are worth (Pardoe, 2005). At an early age Buffett had a knack for making money. At six year old, Buffett made a five cent profit by purchasing a six-pack of Coca-Cola for twenty-five cent and reselling each bottle for a nickel. At eleven, he purchased three shares of Cities Service at $38 per share. Shortly after buying the stock, it fell to just over $27 per share (Kennon). When the shares rebounded to $40 he sold the shares, but regretted his actions when the shares shot up to $200. The experience taught him that patience is a virtue (Kennon). Buffett was a graduate of the University of Nebraska-Lincoln. Some time after graduation, Buffett had the opportunity to work for his mentor, Ben Graham, on Wall Street. There, he spent his day analyzing S&P reports, searching for investment opportunities (Kennon). He took a different interest than that of his mentor, he became interested in how a company worked, what made it superior to competitors and observed how the company was managed when deciding to invest; he was not interested in the corporate leadership of the companies he researched and invested in. In the mid-1950’s Buffett aligned himself...
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...Warren Buffett is Born Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today. a fierce critic of the interventionist New Deal domestic and foreign policy, and his wife Leila (née Stahl). Buffett's DNA report revealed that his paternal ancestors hail from northern Scandinavia, while his maternal ancestors hail from Iberia (present-day Spain[15]) or Estonia.[16] It's been also reported that Warren is not related to Jimmy Buffett despite the same surname.[15] Buffett began his education at Rose Hill Elementary School in Omaha. In 1942, his father was elected to the first of four terms in the United States Congress, and after moving with his family to Washington, D.C., Warren finished elementary school, attended Alice Deal Junior High School, and graduated from Woodrow Wilson High School in 1947, where his senior yearbook picture reads: "likes math; a future stockbroker" At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather's grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making...
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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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...Course No: C-501 Course Name: Managerial Communication A Report on Business Communication Method of Warren Buffett Prepared For: Mr. Zahid Hassan Khan Associate professor, Institute of Business Administration University of Dhaka Prepared By: Md.Tazul Islam Roll:133 Batch:46D Date of Submission: 11-12-2011 Executive Summary: Warren Buffett is considered as one of the most successful investors of the market. A man who started his journey as an investor at the age of 13, continued to cross hurdles of his business carrier. It's annual report season, which includes announcements from the CEO and/or chairman of every public U.S. company. Given that Warren Buffett, the chairman of Berkshire Hathaway, is the most successful investor of all time, you might expect that a 23-page communication from him would be jargon-packed and over most people’s heads. In actuality, Buffett's annual letter to shareholders is famously down-to-earth, conversational, and witty. Never mind for now the specific points he makes: how he communicates his message is a lesson for all of us. Warren Buffett writes his letter to shareholders as a letter to his sisters - then crosses out "Dear Doris and Bertie" and replaces it with "To the Shareholders of Berkshire Hathaway". It’s not enough that Warren Buffett has become one of the richest men in the world. He’s also a world-class communicator – and nowhere does this gift go on public display more than in his annual letter to shareholders...
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...Case Question 1 In his 2002 letter to shareholders, Warren Buffett referred to financial derivatives as the "financial weapons of mass destruction" and a ticking "time bomb" waiting to explode. His perspective may well be derived from his own experience with some derivative positions his company, Berkshire Hathaway Inc, inherited from the $22 billion purchase of General Reinsurance Corporation in 1998 (Berkshire Hathaway Inc, 2002). Unable to find an agreeable counterparty to buy the General Reinsurance Securities, a subsidiary of General Reinsurance Corporation that deals with derivatives, Buffett decided to close it which required him to unwind the subsidiary's derivative positions. The complexity of the derivatives positions took him years to complete the unwinding and at a pretax loss of $173 million for General Reinsurance Corp in 2002 (Berkshire Hathaway Inc, 2002) and $409 million in cumulative pretax loss as of 2008 (Berkshire Hathaway Inc, 2009). He likens the unwinding process to entering hell, stating that derivatives positions were "easy to enter and almost impossible to get exit" (Berkshire Hathaway Inc, 2004). In 2002, trades in derivatives were growing rapidly in recent years and they pose a "mega-catastrophic risk" that could harm not only their sellers and buyers, but the whole economic system for the following reasons: 1. Mark-to-market accounting (Investopedia 2011) is a legal form of accounting for a venture involved in buying and selling securities...
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...“Hortense GREGOIR Monday, November 17th 103300014 Warren E. Buffett, 2005 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 $2.17-billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp? The changes of the stock price for Berkshire Hathaway and Scottish Power plc is due to the fact that the deal between these two companies created value, indeed it created value for the buyers and the sellers because for example thanks to this acquisition Berkshire is more diversified. Moreover, we can also say that the stock prices of Berkshire Hathaway and Scottish Power plc changed due to the variety of products produced by these two companies, for example Berkshire Hathaway has eight types of different products, from insurance to wholesale distributing. The fact that this deal creates value for both buyer and seller prove that the overall market approves it. The $2.17 billion gain in Berkshire’s market value of equity implied that the intrinsic value of PacifiCorp was good. Indeed according to these calculations we can say that its value and its competitors ones are in the same range (see exhibit 9). $2.17 billion312,18 million =6.95 This is what Berkshire is willing to pay for each share of PacifiCorp. 5.1 bilion312.18 million=16.30 6.95+16.30=$23.25 ...
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...The Buffett Approach to Valuing Stocks Focusing on return on capital may be the key to investment success. By Steven R. Ferraro, CFA, PhD 2009 Volume 12 Issue 3 Much has been written about famed U.S. investor and Berkshire Hathaway CEO Warren Buffett’s investment style and successes. Preeminent among these writings are the oft-cited Berkshire Hathaway shareholder letters, written by the “Oracle of Omaha” himself. These informative letters have been the basis for a multitude of books. But even with an abundance of available information on “how to invest like Warren Buffett,” it is apparent that something is lacking, how does Buffett determine an acceptable price for companies of interest? This article provides an example of the process Buffett is reported to go though to determine the intrinsic value of a publicly traded company. Photo: Bogdan Radenkovic Starting at the Beginning Before we get our hands dirty with the valuation aspects of the investment decision, let us review a brief outline of the qualitative and quantitative aspects of Buffett’s decision process as observed by Robert G. Hagstrom.[1] This map helps us navigate the turbulent waters of Wall Street and is comprised of business, management, financial, and market tenets. Investment Tenets Business • Is the business simple and understandable? • Does the business have a consistent operating history? • Does the business have favorable long-term prospects? Management • Is management...
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...CASE#1 Abstract: Warren E. Buffett, 2005 On May 24, 2005, the MidAmerican Energy Holdings Company (a subsidiary of Berkshire Hathaway) would acquire the electric utility PacifiCorp. M would purchase P with $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. MidAmerican is a leader in the production of energy from diversified sources; it is also the owner of the second-largest full-service independent real estate brokerage in the US. Until March 2002, Berkshire has acquired a 9.9% voting interest and an 83.7% economic interest in the equity of MidAmerican. By 2004, Berkshire has always announced and emphasized that it is the time to take some action (acquisition) and to find the “elephant” to make one significant gain. The acquisition of PacifiCorp thus was a good investment target. First of all, PacifiCorp is a leading, low-cost energy producer and distributor which served 1.6million customers in six states in the western US. It has a strategic fit with MidAmerican. Now the main issues are to measure the bid price and future benefits to see that whether this acquisition can fit the criteria of Berkshire – long-term goal of a 15% annual growth rate in intrinsic value. PS: Long-term economic goal is to maximize Berkshire's average annual rate of gain in intrinsic busn value on a per-share basis. We do not measure the economic significance or performance by its size; but by per-share progress. The rate of per-share progress will diminish in the future - a...
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...Warren Buffett's Berkshire Hathaway subsidiary MidAmerica has submitted an application to acquire PacifiCorp, Scottish Power's largest subsidiary headquartered in Portland, Oregon for $9.4 billion. The purpose of this reference summary is to document key news stories, SEC filings, Public Utility Commission filings and other references for financial analysts, journalists, utility regulators and other interested parties. Following each reference will be a brief analysis and commentary section. The references are ordered by date and can be easily searches using key words. Although Copyrighted, all requests to reprint this information will be granted provided that this original source is cited. Based upon an analysis thus far, Parish & Company will not support Mr. Buffett's proposed acquisition due to significant accounting irregularities at Berkshire Hathaway and the absence of adequate financial market controls given the recent repeal of the Public Utility Holding Company Act (PUHCA). Obviously Buffett is under considerable pressure given that his fund does not pay a dividend as Microsoft does, even though such dividends are now 50 percent tax free, and investors in his fund have an effective overall growth in assets since 1998, 7 years ago, of zero. Also noteworthy is that Buffett's hometown is served by the Omaha Public Power District (OPPD), a well managed utility whose annual report can be accessed at www.oppd.com. 2005 August 8 Berkshire Hathaway Quarterly 10Q Filing ...
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...1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power on the day of the acquisition announcement: Specifically, what does the $2.55 billion gin in Berkshire market value of equity imply about the intrinsic value of PacifiCorp? The possible meaning of the change of the stock is that the facts that are created in the deal had a positive effect on both the buyers ( BRK) and the sellers which are the mother company of Pacific( Scottish power), To find the 2.55 Billion gain of BRK on the market value equity that the intrinsic value of Pacific was good because it was within the range demonstrated in the calculations I have done:- $2.55 billion / 312.8 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 (all information taken from chart 9) 2. Based upon the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range? We find the range of possible values for PacifiCorp in chart 10:- A. Revenue median of $6.252 Billion, mean of $6.584 Billion. B. EBIT median of $8.775 Billion, mean of $9.289 Billion. C- EBITDA median of $9.023 Billion, mean of $9.076 Billion. D- Net Income median of $7.596 Billion, mean of $7.553 Billion. E- EPS median of $4.277 Billion, and a mean of $4.308 Billion. F- Book value median...
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...FINANCIAL MANAGEMENT http://mycourses.hult.edu MODULE B 2012-13 INSTRUCTOR Professor Xiaozu Wang EMAIL xiaozu.wang@faculty.hult.edu INSTRUCTOR AVAILABILITY Please contact by email CLASS TIMES & ROOM(S) MIB1: Jan 7, 9, 11, 15, 17, 21, 23, 25, 1:30-4:50, Feb. 1, 9:00-12:20, Feb. 7, 1:30-4:50 COURSE AIMS AND DESCRIPTION OF CONTENT This is an introductory course of finance for MIB students. The course aims to provide students with a conceptual framework and a set of technical tools for making corporate investment decisions. The focus will be maximizing the value of the firm and capital budgeting. Some ethical issues will be highlighted throughout the course. INTENDED LEARNING OUTCOMES Key (Assessed) Learning Outcomes: On completion of this course, students should understand and be able to do the following: 1. Estimate the cost of capital for corporate investment decisions; 2. Make corporate investment decisions using discounted cash flow method; 3. Manage working capital and corporate long-term growth. Supplemental Learning Outcomes: While not assessed, it is anticipated that students will develop the following: 4. Understand the importance of corporate governance for achieving long-term corporate financial objectives and valuation; 5. Understand some unique features of Chinese capital markets. TEACHING AND LEARNING The course will be a mixture of lectures, case discussions and individual and group practices. Students are expected to do the following. 1. 2...
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