This case focuses on the acquisition of PacifiCorp, a low-cost energy product and distributor based in the western United States. Warren Buffet, chief executive of Berkshire Hathaway, Inc., is known for investing in low-cost companies and turning them into billion-dollar companies. MidAmerica Energy Holdings Company is a subsidiary of Berkshire Hathaway Inc; it is the company that will acquire PacifiCorp. Warren Buffett is known for his investment strategy. He studied at Columbia University as a professor of Benjamin Graham, who is known for identifying ways to underestimate stocks. Buffett’s main goal is to maximize the wealth of his shareholders.
Berkshire Hathaway currently has a diversified portfolio of companies, they are subsidiaries, or Berkshire Hathaway has a large stake. Originally founded in 1889, Berkshire Hathaway is a cotton manufacturing company that later became the largest textile manufacturer in New England. In 1955, Berkshire and Hathaway merged, and the merger was in crisis due to economic changes in technology, inflation and social behavior. In 1965, Buffett and a number of partners gained control of Berkshire Hathaway; this is the first of many people to search for “elephants”, an attractive acquisition opportunity.Warren Buffett is accustomed to recording 25% of the revenue as an annual growth rate of intrinsic value; by acquiring PacifiCorp, he will have to accept a 15% smaller return. Berkshire Hathaway is a holding company of diversified portfolios; they are engaged in insurance, apparel, construction products, financial and financial products, flight services, retail, grocery distribution, and carpet and floor coverings. Buffett has a strategy; the philosophy he elaborated in his investment.
Warren Buffett’s first element focuses more on the core of the business and the important factors that keep the business a success, but these factors are not used in financial statements. The economy plays an important role in the life cycle of the business; it can sometimes help determine if a business will succeed or fail. For example, the automotive industry. At some point, everyone wants to own a 6 to 8 cylinder truck. The price of the truck is affordable, the maintenance is the average cost, and the price of the petrol is less than $2 per gallon. Then, the economy changed; businesses failed, people lost their jobs, investment fell, and the war on terror led to conflicts with Iran, which led to higher gasoline prices. With this shift in the economy, 6 to 8 cars are no longer the needs of consumers. As a result, sales were affected, leading to a shift in the automotive industry. In this case, the business is greatly affected by the economy, and until the disaster begins, the financial statements cannot predict the economic recession that occurred.
Warren Buffett’s philosophy is similar; he sees all aspects of the economy as decisive factors. Companies like Apple have a reputation, so when they announced new products, the number of pre-sales was huge because Apple’s reputation was well known. There is no need for people to research or learn; instead, Apple’s reputation and marketing technology have transformed each of its products into consumer demand. It feels like consumers in need will meet this need.
Another key point of Warren Buffets’ first philosophical point of view is that good management skills can make a good business a great business. Some strategy managers are strictly focused on how to exceed the final success of their business. These managers use marketing, SWOT analysis, external factor assessment, internal factor assessment, surveys, and similar business comparisons to develop growth plans. Strategic managers also use financial data to assist with planning.
The cost of losing opportunities. Warren Buffett tends to choose every decision he makes. Comparing the options he thinks are available is more beneficial. Warren Buffett chose to acquire some of the businesses that allowed him to manage the company, become the core decision maker of change, and closely monitor the rate of return with other financial institutions. Warren Buffett also invested in the business, which enabled him to express his opinions in some decisions. Both instances allow control, but a comparison of decisions will determine a greater chance for both.
Value creation: Time is money. Don’t waste time on unproductive things. What you are sacrificing today should be the multiplication/surplus of tomorrow. Before setting the next attractive acquisition opportunity, Buffett and Berkshire waited for several years. PacifiCorp is this opportunity.
Performance is measured by intrinsic value rather than accounting profit. In this philosophical statement, Warren Buffett is expressing how he relies on various analytical techniques to determine the true value of the company. These technologies include identifying target markets, business levels and powers, organizational business models and/or missions. This philosophy also considers ratios, financial statement analysis and stock prices.
Risk and discount rate. Buffett has hardly used debt financing and avoided risks. Buffett is very confident in his business plan. Buffett feels that “the risk comes from not knowing what you are doing.” The buffet knows what he is doing. In 1977, Berkshire Hathaway’s share price was $102. On May 24, 2005, the closing price of Class A shares reached $85,500. This proves the extent to Buffett’s investment in the company.
diversification. Warren Buffett does not believe his holding company is diversified for risk management reasons. Instead, his diversity is based on his company with a strong knowledge base on how to manage and develop them. Success is not based on risk, but on all aspects of the business. Use facts and data to understand the capabilities of investors. The fact that Berkshire Hathaway has acquisition criteria tells you that they know exactly what they are looking for in the business.
Investment behavior should be driven by information, analysis and self-discipline, rather than by emotion or “premonition”. Understand the value of your company based on key factors.
Consistency of agents and owners. More than half of the directors have 50% of their household net worth invested in Berkshire Hathaway, and they say that some people, other investors, are confident in making decisions. I believe this is why shareholders support PacifiCorp, because Buffett made it clear that there will be a return, not the return of other acquisitions in the past, but it is still a great investment. Buffett has considered every component of the industry, how to invest and when to invest. Because of Buffett’s success, some people believe his decision as a manager and investor.
Shares in Berkshire Hathaway and Scottish Power have changed as MidAmerica Energy Holdings Company announced the acquisition of PacifiCorp. When a successful investor with a good track record is acquiring a company, the shares of both companies will rise. History is self-evident, Warren Buffett has the best investment record in history, and he is known for increasing shareholder wealth. Sometimes when an acquisition occurs, the acquisition company usually buys a price that is higher than the market value. When the market finds this situation, it feels like there is a hidden value and there is reason to increase the stock price.
PacifiCorp’s offer 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 other people’s attempts to participate in the bidding through financing. Cash transactions are least risky because they affirm market value. Responsible transactions undertaken through acquisitions appear to be limited to contractual agreements. This means that the unauthorised responsibility is still the responsibility of the Scottish Power Company.
Please refer to the attached discounted cash flow analysis to analyze the market value of PacifiCorp and the company’s projected earnings. Predictive cash flow management must consider various factors; the company’s current market if they are expanding or contracting and how they perform. Once determined, new factors will be identified, for example; will there be a new change in the technology for producing or providing more energy, will the price change immediately? What is the future forecast of the economy?
Among the four major investments; American Express, Coca-Cola, Gillette and Wells Fargo Berkshire invested $3.83 billion through transactions between May 1988 and October 2003. During this period, Berkshire Hathaway A-level stocks steadily climbed. This is 20 years after Buffett gained control of Berkshire Hathaway, and it is clear that large-scale capital investment is necessary to gain competitive control and increase financial returns.
In short, the acquisition of PacifiCorp will meet Buffett’s goals for a long time. There will be many strategic plans in the short term to gain competitive advantage and increase revenue. The bid is appropriate because the forecasted revenue shows a greater cash value. Therefore, the sacrifice cost of today’s investment will generate huge returns in the future. The cash provided by Berkshire is meaningless; it shows the current market value of the investment. There is no risk of lease payments or open doors for other competitors to bid for acquisitions. Cash is a low-risk quote that shows strength and purchasing power. Berkshire Hathaway Inc. announced that its share price was due to the company’s intrinsic value. The reputation of the buffet has increased by 25% compared to previous acquisitions. The previous offer is higher than the current market offer. Buffett is known for looking for attractive acquisition opportunities, and Buffett is known for his valuable management and investment.