CASE QUESTIONS: Warren E Buffett 2005
1. Past performance: Discuss Berkshire Hathaway’s business strategy during
1965-2004. How well did Berkshire Hathaway perform during that period?
Using financial databases (such as Bloomberg, Datastream, Yahoo Finance,
etc.), assess Berkshire Hathaway’s performance in the past 10 years.
Comment on your findings.
2. Investment assessment: Assess Berkshire’s investment in Buffett’s Big Four:
American Express, Coca-Cola, Gillette, and Wells Fargo. Why did Buffett
choose each of these companies? How much is the annual return on
investment on each company and all four as a whole?
3. Investment valuation: Evaluate Berkshire Hathaway’s investment in
MidAmerican Energy Holdings in 2000. Using the information from Exhibit 6,
calculate the net gain to Berkshire Hathaway in 2000 dollars. First, calculate
the free cash flow accruing to Berkshire from MidAmerican each year from
2001 to 2004. Second, discount the cash flows to year 2000 and compare with
Berkshire’s investment in MidAmerican. Assume tax = 40% on EBIT, discount
rate r = 9%, growth rate for the steady period starting 2004 g = 2%. Correction:
Exhibit 6, Balance sheets, Assets: “Properties, plants, and equipment” and
“Goodwill” figures are “gross” amount, not “net”. Clearly state your assumptions
if any.
4. Market reaction: What does the stock market seem to say about the acquisition
of PacifiCorp by Berkshire Hathaway? Specifically, does the deal create value?
If so, for which party? What does the $2.55 billion increase in Berkshire
Hathaway’s market value represent? How does that fit in the literature of
acquirer’s announcement returns?
5. Choice of valuation methods: What do you think PacifiCorp is worth on its own
before its acquisition by Berkshire? Which valuation method should you use to
value PacifiCorp and why? Show clearly the steps to arrive at the following
estimates in Exhibit 10 and assess whether the valuation process done in the
case is reasonable. Create a football field graph summarizing all the valuation
measures.
Enterprise Value as Multiple of: MV Equity as Multiple of:
Revenue EBIT EBITDA Net Income EPS Book Value
Median 6,252 8,775 9,023 7,596 4,277 5,904
Mean 6,584 9,289 9,076 7,553 4,308 5,678
If you need to use a discount rate to discount cash flows then an appropriate
discount rate estimate for PacifiCorp is approximately 9%.
6. Bid assessment: How do you assess the bid for PacifiCorp by Berkshire
Hathaway? How much does Buffett pay for PacifiCorp for its equity and as a
whole? How do these values compare with the firm’s intrinsic values estimated
in Exhibit 10? Does Buffett overpay for the deal?
7. Investment philosophy: Critically assess Buffett’s investment philosophy.
Identify the points where you agree and disagree with him.
Case questions – Warren Buffett
Excel Template – Warren Buffett
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