Warren Buffett

1.0 Introduction:

Warren Buffet has been termed a ‘super-investor’ because he has outperformed the market for 47 years. To 2005, his company, Berkshire Hathaway (BH), had posted 26% annualised growth from 1965. A review of his spoken addresses and written literature reveals that he attributes his success to the intrinsic-value based method of business analysis advocated by Graham and Dodd (1934), which he relied on to acquire the energy company, PacifiCorp (PC). This report will provide a market valuation of PC to determine whether he paid a reasonable price and it will then analyse Buffet’s outstanding record and his investment philosophy. Berkshire Hathaway’s (BH) investment decisions will also be critiqued according to prevailing ethical and social responsibility standards.

2.0 Valuation of PacifiCorp and Analysis

The announcement of PacifiCorp’s sale to MidAmerican Energy Holdings Company caused a jump in the share price of both parent companies Berkshire Hathaway and Scottish Power of 2.4% and 6.28% respectively. The share price rise of Scottish Power could reflect the markets belief that Berkshire overpaid for the company and that Scottish Power made a windfall on the sale. The increase of Berkshire Hathaway’s share price contradicts financial theory and empirical evidence on acquisitions (see Appendix ##). Traditional theory states that the company’s price should have fallen but Buffett’s reputation as a market maker caused the reverse. The share price rise of Berkshire Hathaway may indicate the markets believe that a company owned by Warren Buffett is simply worth more than one not.

MidAmerican Energy purchased PacifiCorp for $5.1 billion in cash and an additional $4.3 in liabilities and shares. This places a value of $9.4 billion on PacifiCorp by MidAmerican and by extension Warren Buffett. Buffett uses a discounted cash flow model (DFCF) to evaluate companies (see Appendix ## - Chris this is your calcs you need to add). Buffett has stated in...