warren buffet 2005

7/30/2019 Warren Buffet 2005

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+Waren E. Buffet, 2005

MM-6023 CAPITALMARKET ANALYSIS

Lecturer : Achmad HerlantoAnggono

Fadhil Ghalib Agam 29112013Indra Pratama Putra MR 29112145

Nadira Saraswati 29112496

Melda Natalina 29112508

Henny Zahrany 29112551


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+Objective

modeling good practice in management and investment usingWarren Buffett as an example by returning to the image ofBuffett repeatedly during a finance course to ask students what

Buffett would likely do in a situation.

exercising simple equity-valuation skills, by using technical

analysis and fundamental analysis


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+Synopsis

On May 24, 2005, Warren E. Buffet, the chairperson and CEOof Berkshire Hathaway Inc., announced that MidAmericanEnergy Holdings Company, a subsidiary of Berkshire

Hathaway, would acquire the electric utility PacificCorp.MidAmerican would purchase PacificCorp from its parent,Scottish Power plc, for $5,1 billion in cash and $4,3 billion inliabilities and preferred stock.


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+Berkshire Hathway Inc.

In 1995, Berkshire merged with Hathaway Manufacturing andbegan a secular decline

In 1965, Buffet and some partners acquired control of BerkshireHathaway, believing that its financial decline could be reversed

On May 24, the firms year-end closing share price was$1022005, the closing price on its Class A shares reched$85,500


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+Berkshires portfolio of business

included Insurance: GEICO, General Re

Apparel: Fruit of the loom, Garan, Fechheimer Brothers, H.H. Brown Shoe, Justin Brands

Building products: Acme Building Brands, Benjamin Moore, Johns Manville, MiTek

Finance and financial products: BH Finance, Clayton Homes, XTRA, CORT, BerkshireHathaway Life, and General Re Securities

Flight services: FlightSafety, NetJets

Retail: Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company,Jordans Furniture, Borsheims, Helzberg Diamond Shops, Ben Bridge Jeweler

Grocery distribution: McLane Company

Carpet and floor coverings: Shaw Industries


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+Buffets Investment Philosophy

1. Economic reality; not accounting reality

2. The cost of the lost opportunity

3. Value creation: time is money

4. Measure performance by gain in intrinsic value, not accounting profit

5. Risk and discount rates

6. Diversification

7. Investing behaviour should be driven by information, analysis, and self-discipline, not by emotion or hunch

8. Alignment of agents and owners


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+MidAmerican Energy Holdings

Company MidAmerican Energy Holdings Company, a subsidiary of

Berkshire Hathaway Inc., was a leader in the production ofenergy from diversified sources

The company was a major supplier and distributor of energy toover 5 million customers in the United States and Great Britain.


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+PacifiCorp

PacificCorp was a leading, low-cost energy producer anddistributor that served 1,6 million customers in six states in theWestern United States.


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+Case Analysis

PasifiCorp Acquisition and The Long Term Goal ofBerkshire Hathaway Technical Analysis

Fundamental Analysis


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+ Technical Analysis

Market/book value of PasifiCorp is less than $1, its about $0.75.

Value destroyed are happen This result against with Buffet philosophy that always prioritize value

creation in investment

There are a lot of company that make value creation with the sameinvestment.


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+ Fundamental Analysis

The uniqueness of pacific corp company is low cost energyproducer, the other competitors dont have it. In our opinion,business competitiveness is determined by the price.

Assumption :

PacificCorp is the market leader and they are a company that hasa good mastery of energy at low cost. So that in the future bylooking at the economic way, PacifiCorp is more profitable thanthe other companies.

Warren buffet phylosophy "economic reality; not accountingreality".

Berkshire Hathaway would be able to increase the marketshare in six states in the Western United States.


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+Bid Price of PacificCorp

Bid Price : $ 9.4 billion

Book value of PacificCorpwhich is $ 3,3 billion is greater

than the average of bookvalue of the other whole

companies in the amount of $

2,7 billion.

Enterprise value of PacifiCorp : $9.9 billion


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+Berkshire Hathaway share price atthe announcement

There is a drastic increase in the price of Scottish Powershares amounting to 6.28% and 2.4% of Berkshire Hathaway.

Caused by the investors psychological who might think that themerger of two major energy companies in the U.S. willstrengthen their core values in the energy business.

The increase of market share value amounting of $ 2.55 billionof Berkshire Hathaway indicated that they got the benefits of

the acquisition, the calculated market value of $ 2.55 billiondivided by the outstanding shares of PacificCorp which is $312.18 million or $ 6.95 / share is still a greater amount thanWarren Buffet paid.


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+Conclusion

Acquiring PacificCorp does not serve the long term goal ofberkshire hathaway based on the technical analysis. This iscaused by PacificCorp does not provide value creation toberkshire hathaway. The long term goal desired by warren buffet is30 years.

The bid price that offered by Berkshire Hathaway to scottishpower is right if compared to the value of another companies,

the increase of stock price on 24 May 2005 is affected by somany investors who buy the stocks due to the thought of that themerger of two major American Companies would strengthen thecore business of energy between the two parties which in turnwould give a big advantage.


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+Recommendation

Based on technical analysis and fundamental analysis that wehave done, and referering to the philosophy of Warren Buffet,PacificCorp is appropriate to be acquired caused by a reason

that they are a low-cost energy producer.

warren buffet 2005

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