Case 1 Warren E. Buffett, 2005 Assignment
Please make your answers as complete as possible by explaining/supporting the rationale
for your position.
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?
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?
a. The possible meaning of the changes in stock price is due to the fact that the deal created
value for both buyers and sellers; Berkshire was more diversified after the acquisition.
b. The $2.55 billion gain in Berkshire’s market value of equity implied that the intrinsic
value of PacifiCorp was good because it fell within the range of competitors based on the
following calculations:
$2.55 billion / 312/18 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 (see Exhibit 9)
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?
