Warren Buffet

Warren E. Buffet, Chairmen of Berkshire Hathaway, is considered one of the world’s most successful investors of all time. He is consistently ranked among the world’s wealthiest people. On May 24, 2005, Berkshire Hathaway announced that the company would acquire through one of their subsidiaries PacifiCorp. PacifiCorp was acquired from its partner company, Scottish Power, for $5.1 billion in cash and $4.3 billion in liabilities and prefer stock (How, 2010).

On the announcement date of the acquisition both Berkshire Hathaway and Scottish Power’s share price increased rapidly. Berkshire Hathaway’s share price closed 2.4% up and Scottish Power’s rose by 6.28% for the day; compared to the S&P 500 which only closed 0.02% up (Refer to Appendix 1 for illustrations of share price movement)(Bruner, R.F. 1010). One explanation is that both parties involved believed that the acquisition was mutually beneficial and created value for both companies, as they believed there was growth potential for the business.

In evaluating whether the bid for PacifiCorp is a “fair” price two valuation techniques will be used; these include a valuation based on the multiples for comparable regulated utilities and DCF method.

It can be seen from exhibit 10 that the potential enterprise values for PacifiCorp range from $6.252 to $9.289 billion. Also the potential market value of equity ranges from $4.227 to $5.904 billion. PacifiCorp was acquired for $9.4 billion, concluding that Berkshire paid a high price for the company. This is because the price is above both the potential enterprise value and the potential market value of equity.

Using the DCF model it can be concluded that the present value of the price paid for PacifiCorp is $4.76 billion (Refer to Appendix 2 for calculations). This figure shows that again Berkshire paid a reasonably higher price for PacifiCorp.

Buffet isn’t a conventional investor, he believes that the intrinsic value is extremely important and is critical...