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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
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According to Buffett, intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple. As the definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures.
Accounting profit can serve as an alternative to intrinsic value. But Buffett states that “...we do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.” Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit), therefore Buffett rejects this alternative. According to the world’s most famous investor, investment decisions should be based on economic reality, not on accounting
The shareholders also have benefit from the acquisition: Abbey's shareholders have the opportunity to own a significant part of the Banco Santander. Under the terms of acquisition, Abbey shareholders receive one new Banco Santander share for every one Abbey share. The effective acquisition will result is existing shareholders of Banco Santander owning 76.4 percent of the issued shares of Banco Santander, and the corresponding 23.6 percent will be owned by the Abbey shareholders.
Royal Dutch Shell also known as Shell, completed its acquisition of BG Group on 15 Feb 2016 with end up negotiation with $70 billion to take over BG Group. The defenses raid start since year 2015. Many people think that Shell act to take over BG is not a good trend because the BG is getting bigger and bigger, many others oil company like Chevron Corporation, ExxonMobil Corporation which is one of the biggest and famous oil company are give up to take over BG, because BG is very expensive, even BG got great resource and nice potential to make their company roses. In long term investing, Merger arbitrage and trading isn’t usually the bad way but by buying into the BG-Shell deal, not only do investors stand to profit from the merger, they’ll
Gaughan, P. A., 2002. Mergers, Acquisitions, and Corporate restructuring. 3rd ed.New York: John Wiley & Sons, Inc.
original offer was well received on Wall Street, but not by the entrenched ITT management. In an unlikely scenario, the bidding company’s stock price actually went up 10 percent since this acquisition made so much sense for Hilton. The offer was made in January, when ITT’s stock price was around 43 dollars.
Is The Tyranny Of Shareholder Value Finally Ending? N.p., n.d. Web. The Web.
...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.
Chang, S. Suk, D. Failed takeovers, methods of payment, and bidder returns, Financial Review. 33 (2), May 1998.
Buffett now spent his days analyzing S&P reports, and looking for investment opportunities. It was during this time Buffett and Graham realized the difference in their philosophies. Although this problem occurred the two managed to overcome it temporarily. During 1950-1956 Buffett built up his personal capital ...
Companies merge and acquire other companies for a lot of strategic reasons with different degree of success. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The impact of mergers and acquisitions on organization can be small and big in other cases.
Acquisition analysis includes determining consideration transferred, goodwill (or gain on bargain) and fair value of assets at the date of acquisition. When Woolly Ltd purchased Jumper Ltd; they paid more then the consideration transferred (fair value of assets less liabilities) of the entity, thus there was goodwill provided. Business combination valuation entries occur when assets or liabilities fair value differs from their carrying amount at the date of acquisition. As Jumper Ltd had assets with a higher fair value than carrying amount; there was reasoning for BCVR entries. Intragroup transactions come about through the transferal of assets or liabilities such as inventory or dividends from the subsidiary to the parent or visa versa (within the group). When Woolly Ltd and Jumper Ltd conduct intragroup transactions, as separate legal entities these transactions are recorded as normal however, from the point of the group these transactions are internal and therefore are not recognized by external users, thus the transactions must be eliminated. Finally, non-controlling interest occurs when the parent owns less than 100% of the subsidiary, however this is not relevant to Woolly Ltd as ownership of Jumper Ltd is 100%. These steps are
McDougall, Gilles. (1995). The Economic Impact of Mergers and Acquisitions on Corporations. Retrieved on July 9th, 2006 from http://strategis.ic.gc.ca/epic/internet/ineas-aes.nsf/vwapj/wp04e.pdf/$FILE/wp04e.pdf
The intrinsic value is calculated by taking the sum of the future income generated from the option and subtracting it from the pr...
Fundamentals of Corporate Finance. (2011). Chapter 3 – The Valuation Principle: The Foundation of Financial Decision Making. Retrieved on July 8, 2011 from http://su3finance.wikispaces.com/Chapter+3+%E2%80%93+The+Valuation+Principle-The+Foundation+of+Financial+Decision+Making.
Value is perceived in different ways, by customers and organisations in relation to the product or service that is provided. The definition of value is what something is worth and the desirability. Also what is gained from the money aspect, and to whether the product or service actually fulfils its purpose.
Value is a term that expresses the concept of worth in general, according to Wordiq (2010) and it is thought to be connected to reasons for certain practices, policies or actions. According to (Lopper, 2008) value is, a principle, or quality intrinsically valuable or desirable.