Tracy Kelly

1/22/2015
Case 1

Warren E Buffett, 2005

This case focuses on the purchase of PacifiCorp, a low-cost energy product and
distributor in the Western United States. Warren Buffet, a CEO for Berkshire Hathaway, Inc was
known for investing in low-cost corporations and turning them into multi-billion dollar
companies. MidAmerica Energy Holdings Company is a subsidiary of Berkshire Hathaway Inc;
it is that corporation that will be acquiring PacifiCorp. Warren Buffet is known for his investing
strategies, he studied at Columbia University under the professor Benjamin Graham whos
known for the development method of identifying undervalued stock. Buffets primary focus is
to maximize the wealth of his shareholders.

Berkshire Hathaway Inc currently holds a diverse portfolio of corporations in which they
are either subsidiaries, or Berkshire Hathaway has a hefty amount of shares. Berkshire
Hathaway was originally incorporated in 1889 as a cotton manufacturing company which grew
to be New Englands biggest textile producer. In 1955 a merger took place with Berkshire and
Hathaway, that merger was in crisis due to economic changes in the area of technology, inflation
and social behavior. In 1965 Buffett and some partners acquired control of Berkshire Hathaway;
this was the first of many, searches for elephants, an attractive acquisition opportunity.

Warren Buffett was accustomed to record earnings of 25% as an annual growth rate in
intrinsic value; with the acquisition of PacifiCorp he would have to settle for smaller earnings of
15% instead. Berkshire Hathaway was a holding company of diversified portfolio; they were
engaged in Insurance, Apparel, Building products, Finance and financial products, Flight
services, Retail, Grocery distribution and Carpet and floor coverings. Buffet had a strategy; a
philosophy in which he expounded upon in his investments.

1. Economic reality, not accounting reality. Warren Buffet first element focuses more on the
heart of the business and the factors that are important to keep it successful but these
factors are not used on a financial statement. Economy plays a strong part in the life
cycle of the business; it sometimes help determine if a business will remain successful or
fail. For instance, the automobile industry. At one point in time everyone wanted to own
a 6 to 8 cylinder truck. The prices of the trucks were affordable, maintenance was of
average cost and gas prices were less than $2 a gallon. Then, there was a shift in the
economy; businesses were failing, people were losing their jobs, investments were
declining, war on terrorism which caused conflict with Iran (the country in which we
received our oil) and caused an increase in gas prices. With such a shift in the economy 6
to 8 cylinder trucks were no longer a desire for consumers. Therefore the sales were
 effected which caused a shift in the auto industry. In this scenario, the business was
greatly affected by the economy and until disaster began a financial statement could not
predict the recession that occurred.

Warren Buffet philosophy is similar; he is looking at various aspects of the

economy as a deciding factor. Companies like Apple has a reputation, therefore when
they announce a new product the number of pre-sales are enormous because the name
Apple has a reputation. A reputation that does not require people to research nor study;
instead Apples reputation and marketing technique has turned each of their products into
a consumer need. A consumer that feels as though they have a need will fulfill that need.

Another great point in Warren Buffets first philosophical point is that great
managerial skills can make a good business a great business. There are strategic
managers that focus strictly on how to outdo the last success of their business. These
managers use techniques such as marketing, SWOT analysis, external factor evaluations,
internal factor evaluations, surveys, comparison of similar businesses, etc to create a
growth plan. Strategic managers also use financial data to assist in the planning.

2. The cost of the lost opportunity. Warren Buffet tends to way his options on every
decision he make. Comparing the options available that he felt are more beneficial.
Warren Buffet has chosen to acquire some businesses which have allowed him to manage
the company, be the core decider for changes and get a closer look at the rate of return
along with other financials. Warren Buffet has also invested in business which allows
him to have a voice in some of the decisions made. Both instances allow for control but
the comparison of the decision will identify the greater opportunity of the two.
3. Value creation: time is money. Dont waste time on unproductive things. What you
sacrifice today should be multiplied / surplus tomorrow. Buffet and Berkshire waited
several years before identifying the next attractive acquisition opportunity. That
opportunity was PacifiCorp.
4. Measure Performance by gain in intrinsic value, not accounting profit. In this
philosophical statement Warren Buffet is expressing how he depends on a variety of
analytical techniques to identify the true value of a company. These techniques consist of
identifying the target market, the hierarchy of the business and the powers that be, the
business model and or mission of the organization. This philosophy also looks at the
ratios, financial statement analysis and stock price.
5. Risk and discount rates. Buffet used almost no debt financing and avoided risk. Buffet is
very confident in his planning for his business. Buffet feels, risk comes from not
knowing what youre doing. Buffet knows what hes doing, in 1977 Berkshire
Hathaway share was priced at $102; on May 24, 2005 the closing price on Class A shares
reached $85,500. This is a testament to how well Buffet invest in a corporation.
6. Diversification. Warren Buffet doesnt feel that his holding company is diversified for
risk management reasons. Instead his diversification is built on companies in which he
 has a strong knowledge base on how to manage and grow them. Success is not based
upon risk but understanding the aspects of a business. Using the facts and data to the
ability of the investor. The fact that Berkshire Hathaway has an Acquisition Criteria tells
you that they are aware of exactly what it is they are looking for in a business.
7. Investing behavior should be driven by information, analysis and self-discipline, not by
emotion or hunch. Research; be informed about the value of your company based upon
key factors.
8. Alignment of agents and owners. With greater than half the directors having 50% of their
family net worth invested in Berkshire Hathaway is saying that there are people, other
investors that have confidence in the decisions being made. I believe this is why the
shareholders will support PacifiCorp because Buffet has made it clear that there will be
returns, not as great as returns of other acquisitions in the past but it is still a great
investment. Buffet has taken into consideration every component of the industry, how to
invest and when to invest. Because of Buffets success there are individuals that trust his
decision as a manager and as an investor.

The stock price changed for both Berkshire Hathaway and Scottish Power due to the
announcement of MidAmerica Energy Holdings Company acquiring PacifiCorp. The increase in
stock price for both companies is common when a successful investor with a great track record is
acquiring a business. History speaks for itself, Warren Buffet has the best investment record in
history, he is known for increasing wealth for shareholders. There are times when acquisitions
occur the takeover company usually purchase higher than what market value is stating. When
the market has identified this, it feels as if there is a hidden value that gives reason to raise the
stock price.

The bid for PacifiCorp is $5.1 billion in cash and $4.3 billion in liabilities and preferred
stock. The reason for the cash transaction is to avoid contingency payments; it also eliminates
others from trying to compete in the bid through ways of finance. Cash transactions are least
risky because it gives affirmation to the markets value. The liability transactions that are
assumed through the acquisition appear to be limited to the contractual agreement. This means
that the un-agreed upon liabilities are still the responsibility of Scottish Power.

See the attached Discounted Cash Flow Analysis to analyze the market value of
PacifiCorp and what the projected earnings will be for the company. To forecast the cash flow
management would have to consider a variety of factors; the current market of the company, if
they are expanding or contracting and how they are performing. Once this is determined new
factors would be identified such as; will there be new ways due to technology of producing or
offering more energy, will there be an immediate price change and what does the future of the
economy predict.

In the Big Four Investment; American Express Company, The Coca-Cola Company, The
Gilette Company and Wells Fargo & Company Berkshire invested $3.83 billion through
transactions between May 1988 and October 2003. During that time the Berkshire Hathaway
Class A stock was on a steady climb. This was due 20 years after Buffet acquired control of
Berkshire Hathaway and it became apparent that large capital investments would be necessary to
gain competitive control and grown the financial returns.

In conclusion PacifiCorps acquisition will meet Buffets goal in the long term. Short
term there will be a lot of strategic planning to gain a competitive advantage and grow the
revenue. The bid price was appropriate because the forecasted revenue shows a larger cash
value. Therefore the sacrificial cost today to invest would respond with great returns in the
future. Berkshires offer of cash was a no brainer; it showed what the current market value of the
investment was. There was no risk of leasing payments or opening the door for other
competitors to bid on the acquisition. Cash is a low risk offer that shows strength and buying
power. The increase in share price for Berkshire Hathaway at the announcement was due to the
intrinsic value of the company. Buffet has a reputation of 25% growth over previous
acquisitions, the upfront offer was above what the current market price quoted, Buffet is known
for searching for attractive acquisition opportunities and because Buffet is known for valuable
management as well as investments the price increased.