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Waren E. Buffet, 2005

MM-6023 CAPITAL MARKET ANALYSIS

Lecturer : Achmad Herlanto Anggono

Fadhil Ghalib Agam Indra Pratama Putra MR Nadira Saraswati Melda Natalina Henny Zahrany

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Objective

modeling good practice in management and investment using Warren Buffett as an example by returning to the image of Buffett repeatedly during a finance course to ask students what Buffett would likely do in a situation.
exercising simple equity-valuation skills, by using technical analysis and fundamental analysis

Synopsis

On May 24, 2005, Warren E. Buffet, the chairperson and CEO of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacificCorp. MidAmerican would purchase PacificCorp from its parent, Scottish Power plc, for $5,1 billion in cash and $4,3 billion in liabilities and preferred stock.

Berkshire Hathway Inc.

In 1995, Berkshire merged with Hathaway Manufacturing and began a secular decline
In 1965, Buffet and some partners acquired control of Berkshire Hathaway, believing that its financial decline could be reversed

On May 24, the firms year-end closing share price was $1022005, the closing price on its Class A shares reched $85,500

Berkshires portfolio of business included

Insurance: GEICO, General Re Apparel: Fruit of the loom, Garan, Fechheimer Brothers, H.H. Brown Shoe, Justin Brands Building products: Acme Building Brands, Benjamin Moore, Johns Manville, MiTek Finance and financial products: BH Finance, Clayton Homes, XTRA, CORT, Berkshire Hathaway Life, and General Re Securities Flight services: FlightSafety, NetJets Retail: Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture Company, Jordans Furniture, Borsheims, Helzberg Diamond Shops, Ben Bridge Jeweler Grocery distribution: McLane Company Carpet and floor coverings: Shaw Industries

Buffets Investment Philosophy

1. 2. 3. 4. 5. 6. 7.

Economic reality; not accounting reality

The cost of the lost opportunity Value creation: time is money Measure performance by gain in intrinsic value, not accounting profit Risk and discount rates Diversification Investing behaviour should be driven by information, analysis, and selfdiscipline, not by emotion or hunch Alignment of agents and owners

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MidAmerican Energy Holdings Company

MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., was a leader in the production of energy from diversified sources
The company was a major supplier and distributor of energy to over 5 million customers in the United States and Great Britain.

PacifiCorp

PacificCorp was a leading, low-cost energy producer and distributor that served 1,6 million customers in six states in the Western United States.

Case Analysis
PasifiCorp

Acquisition and The Long Term Goal of Berkshire Hathaway

Technical Analysis Fundamental Analysis

+ Technical Analysis

Market/book value of PasifiCorp is less than $1, its about $0.75. Value destroyed are happen This result against with Buffet philosophy that always prioritize value creation in investment There are a lot of company that make value creation with the same investment.

Fundamental Analysis

The uniqueness of pacific corp company is low cost energy producer, the other competitors dont have it. In our opinion, business competitiveness is determined by the price. Assumption : PacificCorp is the market leader and they are a company that has a good mastery of energy at low cost. So that in the future by looking at the economic way, PacifiCorp is more profitable than the other companies.

Warren buffet phylosophy "economic reality; not accounting reality".

Berkshire Hathaway would be able to increase the market share in six states in the Western United States.

Bid Price of PacificCorp

Bid Price : $ 9.4 billion

Book value of PacificCorp which is $ 3,3 billion is greater than the average of book value of the other whole companies in the amount of $ 2,7 billion.

Enterprise value of PacifiCorp : $9.9 billion

Berkshire Hathaway share price at the announcement

There is a drastic increase in the price of Scottish Power shares amounting to 6.28% and 2.4% of Berkshire Hathaway.
Caused by the investors psychological who might think that the merger of two major energy companies in the U.S. will strengthen their core values in the energy business. The increase of market share value amounting of $ 2.55 billion of Berkshire Hathaway indicated that they got the benefits of the acquisition, the calculated market value of $ 2.55 billion divided by the outstanding shares of PacificCorp which is $ 312.18 million or $ 6.95 / share is still a greater amount than Warren Buffet paid.

Conclusion

Acquiring PacificCorp does not serve the long term goal of berkshire hathaway based on the technical analysis. This is caused by PacificCorp does not provide value creation to berkshire hathaway. The long term goal desired by warren buffet is 30 years. The bid price that offered by Berkshire Hathaway to scottish power is right if compared to the value of another companies,
the increase of stock price on 24 May 2005 is affected by so many investors who buy the stocks due to the thought of that the merger of two major American Companies would strengthen the core business of energy between the two parties which in turn would give a big advantage.

Recommendation

Based on technical analysis and fundamental analysis that we have done, and referering to the philosophy of Warren Buffet, PacificCorp is appropriate to be acquired caused by a reason that they are a low-cost energy producer.