Acquisition of Geico by Berkshire Hathaway

What does the stock market seem to be saying about the acquisition of GEICO by Berkshire Hathaway?

The opening paragraph of case study clearly emphasized the positive reaction of stock market on the $2.3 billion acquisition deal. GEICO’s shareholders got a handsome 26 percent premium per share. Berkshire Hathaway’s stock increased by 2.4 percent for the day which in terms of market value saw a boost of $718 million in a single day. This impacted S&P 500 index by taking it up by 0.5 percent. So, clearly stock market welcomed Berkshire Hathaway’s move to acquire GEICO.

Based on your own analysis, what do you think GEICO is worth on its own (i.e., before acquisition by Berkshire Hathaway) ?

I would evaluate multiple analyses done in the case study to emphasize my own analysis.

By 1980 Berkshire Hathaway already had 33 percent shares. Even though GEICO’s share prices was affected by double-digit inflation during 1975-1980, company kept paying high dividend and over the time period of 1974 to 1994 dividend payout saw positive growth. The average annual total return on GEICO’s stock was 13.5 percent. All these indicate that GEICO was in good financial health and had a huge potential in terms of intrinsic value from the investors perspective. To back up this view I would further refer to the Value Line’s forecast performed on GEICO. As per the valuation of GEICO’s intrinsic Value (page 12), forecasted dividend would grow during the period of 1996 to 2000 and forecasted stock price would be $90 to $125 per share. This is up by 28.5% to 78.5% from the acquisition value of $70 per share.

Apart from this company had huge presence in auto insurance known as low cost insurance provider and had extremely valuable senior managers who would increase my faith in above forecasts.

Well, maybe Buffet is overpaying- does he have a record of this in the past?

My personal answer would be Yes and No (generic answer would be Yes)

YES : It depends from which point of view...