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CASE QUESTIONS: Warren E Buffett 2005

1. Market reaction: What does the stock market seem to say about the acquisition of PacifiCorp by Berkshire Hathaway? Specifically, does the deal create value? If so, for which party? What does the $2.55 billion increase in Berkshire Hathaway’s market value represent?
2. Choice of valuation methods: What do you think PacifiCorp is worth on its own before its acquisition by Berkshire? Which valuation method should you use to value PacifiCorp and why? Show clearly the steps to arrive at the following estimates in Exhibit 10:

Enterprise Value as Multiple of: MV Equity as Multiple of: Revenue EBIT EBITDA Net Income EPS Book Value Median 6,252 8,775 9,023 7,596  4,277 5,904 Mean 6,584 9,289 9,076 7,553  4,308 5,678 If you need to use a discount rate to discount cash flows then an appropriate discount rate estimate for PacifiCorp is approximately 9%.

3. Bid assessment: How do you assess the bid for PacifiCorp by Berkshire Hathaway? How much does Buffett pay for PacifiCorp for its equity and as a whole? How do these values compare with the firm’s intrinsic values estimated in Exhibit 10?
4. Investment valuation: Evaluate Berkshire Hathaway’s investment in MidAmerican Energy Holdings in 2000. Using the information from Exhibit 6, calculate the net gain to Berkshire Hathaway in 2000 dollars. First, calculate the free cash flow accruing to Berkshire from MidAmerican each year from 2001 to 2004. Second, discount the cash flows to year 2000 and compare with Berkshire’s investment in MidAmerican. Assume tax = 40% on EBIT, discount rate r = 9%, growth rate for the steady period starting 2004 g = 2%. Correction: Exhibit 6, Balance sheets, Assets: “Properties, plants, and equipment” and “Goodwill” figures are “gross” amount, not “net”. Clearly state your assumptions if any.
5. Past performance: Discuss Berkshire Hathaway’s business strategy during 1965-2004. How well did Berkshire Hathaway perform during that period? Using financial databases (such as Bloomberg, Datastream, Yahoo Finance, etc.), assess Berkshire Hathaway’s recent performance during the period of 10 years up the end of last year. Comment on your findings.
6. Investment assessment: Assess Berkshire’s investment in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo in terms of strategy and return performance (each individual company and portfolio as a whole).
7. Investment philosophy: Critically assess Buffett’s investment philosophy. Identify the points where you agree and disagree with him