Case Study : Berkshire Hathaway And Scottish Power Plc On The Day Of Acquisition Announcement

Case Study : Berkshire Hathaway And Scottish Power Plc On The Day Of Acquisition Announcement

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Case Study #1 – Warren E. Buffett, 2005

Olena (Alyona) Gladyshko

1. What is the possible meaning of the change in stock prices for Berkshire Hathaway and Scottish Power plc on the day of acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire’s market value of equity imply about the intrinsic value of PacifiCorp?

Generally speaking, the change in stock prices on the day of the acquisition announcement means that the market approves or disapproves the acquisition. As the market value of Berkshire 's company went up, it demonstrates the market approval of it and created value of $2.55 billion for both buyers and sellers.

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?
To answer this question, I looked at the Exhibit 10 (p. 22) where one can find the ranges of all the possible values for PacifiCorp. Implied values for PacifiCorp’s enterprise value and market value of equity are derived using the median and mean multiples of the comparable firms.
All the possible values for PacifiCorp are:
Revenue median = $6,252 to $6,584 billion
EBIT = $8,775 to $9,289 billion
EBITDA = $9,023 to $9,076 billion
Net Income = $7,596 to $7,553 billion
EPS = $4,277 to $4,308 billion
Book Value = $5,904 to $5,678 billion

3. Assess the bid for PacifiCorp. How does it compare with the firm’s intrinsic value?
Buffet’s bid for PacifiCorp was 5.1 billion in cash and 4.3 billion in liabilities and preferred stock, so the total value of the bid was equal to $9.4 billion which falls out of the range of possible values for PacifiCorp given above. Buffett 's view of the intrinsic value is as following: “Intri...

... middle of paper ...

... Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp?

In my opinion, Berkshire Hathaway 's shareholders should endorse the acquisition of PacifiCorp. PacifiCorp was a leading, low-cost energy producer and distributor with a good customer base and solid financial records. It had a real potential of becoming the company 's long sought “elephant” since it complied with Berkshire 's acquisition criteria of being a large purchase, demonstrating consistent earning power, having management in place, on top of that, PacifiCorp was outperforming comparable firms in a number of different areas.
Furthermore, PacifiCorp may add around $250 million in net income for MidAmerican Holdings if it keeps operating at the same net income pattern as it had for the past two years. This added net income can provide a stable long term influx of money for the company.

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