3 Case 1 Warren E. Buffet, 2005
WARREN E. BUFFETT, 2005
Teaching Note
Synopsis and Objectives
Set in May 2005, this case invites the student to assess Berkshire Hathaway’s bid, through
MidAmerican Energy Holdings Company, its wholly owned subsidiary, for the regulated energy–
utility PacifiCorp. The task for the student is to perform a simple valuation of PacifiCorp and to
consider the reasonableness of Berkshire’s offer. Student analysis readily extends into the
investment philosophy and the remarkable record of Berkshire’s chair and CEO, Warren E.
Buffett.
The case is an introduction to a finance course or a module on capital markets. The
analytical tasks are straightforward and intended to provide a springboard into discussion of the
main tenets of modern finance. Thus, the case would be useful for:
setting themes at the beginning of a finance course, including risk-and-return, economic
reality (not accounting reality), the time value of money, and the benefits of alignment of
agents and owners
linking valuation to the behavior of investors in the capital market
modeling good practice in management and investment using Warren Buffett as an
example by returning to the image of Buffett repeatedly during a finance course to ask
students what Buffett would likely do in a situation
characterizing stock prices as equaling the present value of future equity cash flows
exercising simple equity-valuation skills
While the numerical calculations in the case are simple, novices will find it to be a meaty
introduction to a number of important concepts in finance. Ideally, the case could be positioned
Suggested
complementary case
about investment
managers and superior
performance: “Bill Miller
and Value Trust”
(Case 2).
4 Case 1 Warren E. Buffet, 2005
near the beginning of a course or module, after which it can be reinforced by other cases and
exercises.
5 Case 1 Warren E. Buffet, 2005
Suggested Questions for Advance Assignment
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 $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value
of PacifiCorp?
2. Based on the multiples for comparable regulated utilities, what is the range of possible
values for PacifiCorp? What questions might you have about this range?
3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value? As an
alternative, the instructor could suggest that students perform a simple discounted cash-
flow (DCF) analysis.
4. How well has Berkshire Hathaway performed? How well has it performed in the
aggregate? What about its investment in MidAmerican Energy Holdings?
5. What is your assessment of Berkshire’s investments in Buffett’s Big Four: American
Express, Coca-Cola, Gillette, and Wells Fargo?
6. From Warren Buffett’s perspective, what is the intrinsic value? Why is it accorded such
importance? How is it estimated? What are the alternatives to intrinsic value? Why does
Buffett reject them?
7. Critically assess Buffett’s investment philosophy. Be prepared to identify points where you
agree and disagree with him.
8. Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp?
Suggested Supplemental Readings
As the case indicates, there is a growing library of books and articles about Buffett and his
investment style. The instructor may choose to assign readings from one or more of the
publications listed in Exhibit TN1. Alternatively, it may be appropriate simply to share the list of
books with students to illustrate the breadth of scholarship and reportage about the Sage of
Omaha, Warren Buffett.
Suggested Teaching Plan
The following questions could be used to motivate a 90-minute discussion of the case:
1. What does the stock market seem to be saying about the acquisition of PacifiCorp by
Berkshire Hathaway?
This opening offers the opportunity to develop the notion that stock prices are the present
value of expected cash flows. Moreover, it deals with the immediate opening problem of
6 Case 1 Warren E. Buffet, 2005
the case: the market’s response to the PacifiCorp announcement. Finally, it should help to
motivate a discussion of Buffett’s investment philosophy.
2. Based on your own analysis, what do you think PacifiCorp was worth on its own before
its acquisition by Berkshire?
This question expands upon the opening question and helps deepen the mystery about the
acquisition—the bid price seems to be a fairly full-price offer for PacifiCorp.
3. Well, maybe Buffett is overpaying—does he have a record of overpaying in the past?
Here, the discussion should shift to an analysis of Berkshire’s general record, its
experience with MidAmerican, and its experiences buying equity positions in the Big Four.
The general conclusion will be that Buffett has done very well as an investor and as the
manager of Berkshire.
4. Here are the major elements of Buffett’s philosophy. What do those elements mean? Do
you agree with them?
On a sideboard, one could list the major topic headings given in the case. The aim here
should be to discuss the intuition behind each point: why Buffett holds those views and
what they imply for his work. If the students already have been exposed to the major
underpinnings of modern finance, this segment of the discussion would take the form of a
