What can be inferred from the changes in the stock price of Scottish Power plc and Berkshire Hathaway

on the day of the acquisition announcement?

The increase in the market price of Berkshire Hathaway and Scottish, market approve of acquisition that creates value for both sides. These can be inferred in following reason that what cause the market value increased.

Firstly, signal effect of the investment movement of Warren Buffett that is seen as anomaly. Before the date of acquisition, if we look at Berkshire Hathaways investment history (1976-2006) the equity portfolio of company beat the benchmarks, and it is on average exceeding the S&P 500 Index by 11.14%. Moreover, the primary of Warren Buffet is to invest in growth stock rather than value stocks (Martin& Puthenpurackal, 2008). Hence, Warren Buffets portfolio was seem outperform than others during the period, which may explain Warren Buffet as signal that attract investors bid up the price of both companies.

Secondly, Chatterjee (1986) states that mergers could possible the create value, especially in horizontal mergers, due to improve cost-efficient production. In this case, MidAmerican acquisition PacifiCorp can be seem as horizontal mergers (collusive synergies), which create the utilization of economics of scale, which lower the production cost. According to Chatterjee (1986) study indicates that if financial synergy can be fully exploited (large relative size of the acquiring firm), then the merger-related gains appear to be greater.

Finally, Warren Buffet (2005) argued that energy industry will important be in the future, hence Berkshire Hathaway decided to expand the investment, and we believed that PacifiCorp can have good earning returns in the future. After approval of acquisition, it would create a assets value more than $32 billion in total; MidAmerican will generate $10 billion revenue annually (Karen Ricardson, Rebecca Smith 2005).

Assess the bid for PacifiCorp. Do you think the bid is a fair price?

The department of revenue of the state of Montana (DOR) appraisal of $7.1 billion for value of PacifiCorp throughout their cost approach by used of CAPM. Moreover, PacifiCorp through their cost approach calculated a book value of $8,604,483,817, and after deducting of estimate for economic obsolescence (amount by 30.56% off). Final estimate of value was $5,975,000,000 (State Tax Appeal Board, 2007).

Also, based on the comparable regulated utilities Table.1, the rang of possible value to Pacificorp was $6 billion to $9 billion. The cost method valuations of the Department and PacifiCorp office are derived from known and accurate financial information. However, MidAmerican Energy purchased PacifiCorp for a price of approximate $9.3 billion (State tax appeal board, 2007). This sales price was out of range both the book equity value and the net plant value as estimation. The argument could be as following: Firstly, Buffett thinks intrinsic value is all important and is the only logical way to evaluate the relative attractiveness of investment and business.According to Warren Buffetts value investment method, rather than looking at Beta, CAPM or covariance in returns among securities, we concentrate on intrinsic value of the business (Buffett 1984). Under Warren Buffetts unique valuing method, which includes other factors to estimate intrinsic value of company such as intangible assets, these will add value to the firm. That means Buffett use intrinsic value instead of book value or historical data to determine his investment choices. He could makes purchase at the price below or equals the intrinsic value.In fact, the $2.55 billion gain in Berkshire market value of equity implied that intrinsic value was good. Secondly, There may be synergistic benefits between two companies, such metioned above synergy create economic value of firm, which is the intrinsic value (economic value) of firm concern by Waren Buffett. Moreover, according to evdince of research, Mukherijee & Kiyamaz & Baker (2003) survey CFOs of U.S. firms engaged in Mergers and Acqusitions (M&As), by acquistion, results also show that most firms believe diversification is a justifiable motive for acquisitions, most notably as a means of reducing losses during economic downturns.

In fact, there was an increase in stock price for both companies on the announcement day. That indicates a market approval for the acquisition for both buyer and seller.

Table 1.

Reference

Martin, G & Puthenpurackal, J (2008). Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway. Retrieved 20th of April. 2012 from: Social Science Research Network. Chatterjee, S (1986)Types of Synergy and Economic Value: The Impact of Acquisitions on Merging and Rival Firms. Strategic Management Journal, 7, 119-139. doi: 10.1002/smj.4250070203 State Tax Appeal Board (2007). Before the state tax appeal board of the state of Montana. Retrieved 21th April 2012 from http://stab.mt.gov/content/pdf/pacificorp.pdf. . Buffett, W. E. (1984). The Superinvestors of Graham-and-Doddsville. Retrieved from Columbia Business School Magazine.