Warren Buffet Case.

INTRODUCTION.

In this following paper we will be touching the case of “Warren E. Buffett, 2005” that mainly focuses on the announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. In Buffett's largest deal since 1998, and the 2nd largest of his entire career, MidAmerican would purchase PacifiCorp from its parent, Scottish Power plc, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock. We will be explaining how on Warren Buffet CEO for Berkshire Hathaway was known for investing in low-cost corporations and turning them into more profitable companies.

The main point of this paper will be to give the reader and understanding on the Buffett’s principles, and how the analysts on this case hope to illuminate in how and why it was the acquisition of PacifiCorp was a good deal by providing the different investment philosophy’s that the buffet use to solve different inconvenient.

BACKGROUND.

On this case we will talk about who was Warren E. Buffett and all the success he did during many years. Warren was the CEO of Berkshire Hathaway Inc. with a good position in which one of their subsidiaries MidAmerican Energy Holding Company, would acquire the electric utility of PacifiCorp. This was one of the largest deals made by Buffett since 1998 and the second largest in his entire career.

MidAmerican would purchase PacifiCorp from its parents, Scottish Power plc, for 5.1 billion dollars in cash and 4.3 million in liabilities and preferred stock this deal make a gain in the market value for $2.55 billion in which Buffett was so happy because one of the principal interest was the energy sector. With this acquisition Warren renew the public interest of the sponsors.

Warren Buffett one of the richest individuals in the world with net worth of $44 billion, he was respected and beloved. Even though Berkshire paid him only $100,000 per year for the service of CEO, he was not looking for cash compensation for all he made he wanted to look forward on how investment need to be implemented to have success. He kept over 99% of his net worth inside the company.

Buffet was acclaimed by many intellectual geniuses although he held an MBA from Columbia University and credited his mentor, Professor Benjamin Graham; with developing the philosophy of value based investing that had guided Buffet to his success he chided business schools for the irrelevance of their finance and investing theories.

Buffett developed principles that gained the respect of many investors to see the success he did during the purchase of PacificCorp.

Buffett’s Investment Philosophy

Warren Buffett was first exposed to formal training in investing at Columbia University where he studied under Professor Benjamin Graham. Graham developed a method of identifying undervalued stocks (that is to say, stocks whose prices were less than their intrinsic value). This became the cornerstone of modern value investing. Graham’s approach was to focus on the value of assets, such as cash, net working capital, and physical assets. Eventually, Buffett modified that approach to focus also on valuable franchises that were unrecognized by the market.

Over the years Buffett had expounded his philosophy of investing in his chairperson’s letter to the shareholders in Berkshire Hathaway’s annual report. By 2005, those lengthy letters had accumulated a broad following because of their wisdom and their humorous, self-deprecating tone.

The letters emphasized the following elements:

1.        Economic reality, not accounting reality.

2.        The cost of the lost opportunity.

3.        Value creation: time is money.

4.        Measure performance by gain in intrinsic value, not accounting profit.

5.        Risk and discount rates.

6.        Diversification.

7.        Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or “hunch.”

8.        Alignment of agents and owners.

ANALYSIS.

Berskshire Hathaway Inc.

Incorporated in 1889 as Berkshire Cotton Manufacturing. Was one of the biggest textile producers in the U.S (25%)

In 1995 merged with Hathaway Manufacturing and began a secular decline due to inflation. (Technological Changes and intense competition)

In 1965 Buffet acquire Berkshire Hathaway, believing that its financial decline could be reversed

Over the next 20 years they expect that their financial results would be mediocre.

Fortunately, the textile group generated enough cash in the initial years to permit the firm to purchase two insurance companies headquartered in Omaha: National Indemnity Company and National Fire & Marine Insurance Company.

In 1985 Berkshire Hathaway exited the textile business.

In 2004, Berkshire Hathaway's annual report described the firm as "a holding company awning subsidiaries engaged in a number of diverse business activities." Berkshire's portfolio of businesses included:

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