WARREN E. BUFFT 2005 Harvard Case Solution & Analysis


This case focuses on the acquisition of PacifiCorp, a subsidiary of Scottish Power, in 2005. Warren Buffet, the chief executive officer and the chairperson of Berkshire Hathaway Inc. was looking for a big acquisition since a long time. A deal was made for $5.1 billion as cash and $4.3 billion in preferred stock and liabilities. As soon as this acquisition was announced, the share price of Berkshire was increased by $2.55 billion (almost 2.4%).

Apart from this, the case also presents the stock investment philosophies of the greatest investor (Warren Buffet). These philosophies specifically focused on diversification, cost of lost opportunity, discount rates and risk, intrinsic value creation and maximization, economic reality and also focused on the investor’s behavior.

Furthermore, the case asks questions of whether the acquisition of PacifiCorp serve the long term objectives of Berkshire, whether the price that the company was paying was fair in relation to the value of the company and also how did the announcement of the acquisition impacted the share price of Berkshire and what were thereasons behind this.


The management of Berkshire announced that, the owners of MidAmerican Energy Holdings Company will acquire PacifiCorp, as ithada very positiveimpact on the market. As a result the stock prices of both of the companies had increased. Whenever one company acquires another company, there is a short-term positive impact on the market. This means that the market is indicatingthat they approved this acquisition and this also conveys the true potential of Berkshire to its investors. Apart from this, another reason for increase in the price was the successful history and remarkable prediction philosophies of Warren Buffet, due to which Berkshire had been achieving compounded growth of 24% on its stocks. This shows that the performance of Berkshire had been outclass during the previous years. Another reason is about the successful acquisition history of Warren Buffet, which he also called as the ‘Big Four’. Exhibit 3 in the case summarize these acquisitions in detail with the value created by each.


The bid price for PacifiCorp has been calculated throughtwo different ways which are based on the information given in the case. First, the company’s value has been derived from the comparable firm’s value in the energy sector. Based on this analysis, the bid price should be in between $6252 to $9289 million. However, the price set by Berkshire is $9.4 billion. This makes it clear that the bid is very high and it would not create intrinsic value. Based on the analysis of market value of equity, the company can acquire equity stake in PacifiCorp within$4277 to$5904 million. If the company pays cash of $5.1 billion to acquire the entire equity stake, then the present value of that bidwill be $4665 million for Berkshire.

Second method is based on the free cash flow to calculate the enterprise value. The data has been used for the year 2004 and 2005 and future projections have been made based on certain assumptions. The free cash flow for each year and the terminal value of the business thereafter has been calculated. But as we are not given any future growth rate, therefore we have calculated the value for these years only. These free cash flows have been discounted on the calculated cost of the capital i.e. 7%. This gives us the enterprise value of PacifiCorp of $10 billion. This method shows that the bid is for $9.4 billion and on the day of announcement, Berkshire had gained $2.55 million in market value. Therefore, the bid price based on this method is appropriate.


The investment records of Warren Buffet prove that he has been remarkable and uncomparable when itcameto investing in good stocks. His first philosophy introduced the concept of economic reality, which states that when analyzing stocks not only the company’s financial statement but all the other aspects of the company should be considered. He defined the intrinsic value as the discounted value of the future cash flows of the company, this shows about the future growth potential of the company. Warren Buffet focused on creating the intrinsic value and not accounting profits only. He also stated a philosophy related to diversification. This contradicted conventional finance theory. He emphasized on to look out for exceptional stocks and it is not necessary to diversify to minimize the portfolio risk. Investors should think about themselves as the owners of the company when investing in the stocks. Another of his philosophy that contradicted conventional finance theory was, that he didn’t considered the risk factor.Apart from this, Buffet emphasized for investors to form their own ideas and not instinctively follow the market. People should analyze each stock based on financial and operational status of the company...............

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