Finance 7010 Case Study
A case study of Berkshire Hathaway’s acquisition of PacifiCorp in 2005 reveals
Warren Buffett’s unique approach to acquisitions. His measure, deemed “intrinsic value”,
is the present value of a company’s future performance. The future performance of the
business takes into account the attractiveness of a company’s long-term prospects, its
ability to create value, the simplicity of its business, the consistency of its operating
history, and he quality of its management. To calculated intrinsic value, Buffett then
quantifies these measures of future performance. In contrast to Buffett’s system, many
analysts employ databases, statistical skills, and other methods of quantifying expected
performance based on prior performances. These alternatives to Buffett’s theories look at
trends in the stock market. Buffett rejects these valuations because he believes that risk
comes relying on the “fashionable” trends of stock market changes, and further, from
ignorance about the value of future expected performance.
Furthermore, Buffett has the success and the confidence behind his investment
philosophy to support his approach. Buffett and his wife have invested over 99% of their
net worth in his company, Berkshire Hathaway. Most of Berkshire Hathaway’s directors
also have at least 50% of their net worth invested in Berkshire. Nevertheless, his
investing philosophy may not work for everyone. Buffett buys for more than a simple
investment; he buys for ownership and/or for significant voting rights. Many investors do
not have the capital to invest to that degree, nor do they have the time to wait for the
company to succeed. This difference in Buffett’s philosophy from that of many other
investors led to many questions about Berkshire Hathaway’s acquisition of PacifiCorp, an
energy company. These questions, though, were amidst great trust in Buffett, as reflected
in the stock market.
On the day of the acquisition announcement, stock prices of Scottish Power, an
energy company and the previous owner of PacifiCorp, gained more (in percentage) than
Berkshire Hathaway’s. In fact, Berkshire added $2.55 billion (2.4%) to Market Value
Equity. The increase resulted an $8.17 gain per share for PacifiCorp
($2.55bil/312.18mil), while Scottish Power gained 6.8%. By adding PacifiCorp into
Berkshire Hathaway’s MidAmerican portfolio, the company also increased its own
energy utility customer base while potentially decreasing its operation expenses. To
investigate this acquisition further, PacifiCorp’s costs can be put into the context of
Berkshire’s stated ranges of equity value and market value equity.
The range of Equity Value was $6.252 billion to $9.289 billion and the range of
