Berkshire Hathaway, 2005 Essay

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Warren E. Buffett, 2005 Financial Case Analysis On May 24, 2005, it was announced that MidAmerican Energy Holding Company would acquire PacifiCorp from its parent company, Scottish Power plc. The deal would be for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. MidAmerican Energy’s parent company is Berkshire Hathaway Inc. Upon the announcement of the deal both Scottish Power and Berkshire Hathaway’s shares increased by 6.28% and 2.4% respectively. This translated into a market value gain for Berkshire Hathaway of $2.55 billion. In the short term, this was windfall for both parent companies. As a consultant to the shareholder’s, I would speculate that the increase in the share prices were due to the fact that Scottish Power was divesting itself of an underperforming asset where Berkshire Hathaway has market confidence in turning PacifiCorp around to being a higher performing asset. This market confidence is derived from Berkshire Hathaway’s history of growth centered investments. The shareholders have a vested interest in the implied value of PacifiCorp because it is an indication of the return on investment the shareholders can expect. When looking at Exhibit 10 in the case, it gives the shareholders insight into the enterprise value as a multiple of REV, EBIT, EBITDA and Net Income. The range of these possible implied values $6.252 billion to $9.076 Billion. It also gives the Market Value as a multiple of Earnings per Share and Book Value. That range is $4.277 billion to $5.904 billion. The question is, which value to use when it comes to figuring the intrinsic value of PacifiCorp. It would be my recommendation to use the enterprise value as a multiple of EBITDA. Market value as a multiple of EPS or BV or Enterprise value as a multiple of REV, EBIT or Net Income can be biased by the comparable company’s

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