Lecture 10: Analyzing Buffett
’s Purchase of
Coke in order to Purchase Moody
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road you are still going to have
and its advantages
the same as when you initially boughtthe company.To give you a little bit of history: originally
revenue came from bond investors who paidfor
ratings. Then the rating industry changed dramatically in the 1970s because therating companies began to charge issuers as well as investors. And this was a huge deal for
because it meant that rating agencies had gained so much clout, they could chargecompanies who wished to issue debt or else they would face higher borrowing costs in themarket.Today
both have about 40% of the rating industry. Frequently companies getratings from both rating agencies. Since ratings are very important in the capital market,companies issuing debt will get ratings from both companies since these companies do notwant to be dependent upon one rating agency.
’s 2000 FY
Revenue GrowthRateOperating Profit Growth Rate
Growth rate for 19 years 15% 17%In 19 years only 1 year of decline in revenue. Very stable.Does past success = future success?
Sometimes it does and sometimes it doesn’t.
growth rate is phenomenal considering its long time period.Look at the market share stability. The global public debt market grew rapidly over the past 25years. Basically what was happening was that there was disintermediation in the debt markets.Banks were doing less lending so companies were moving to issue more debt in the publicmarkets, therefore they needed more ratings. You had more securitizations for mortgage loans,car loans
the financial markets were evolving. The market share had not changed much
. It was our conclusion that
’s growth was likely to
continue. Europe and Asia emergence can provide future growth. Less competitive pressure.It was easy to understand there would be a lot of future growth and not much competitivepressure. Both rating agencies had to be paid. It was very unlikely someone could enter thebusiness because you need credibility. No matter how profitable the business or fast it was
growing, a competitor could not obtain the confidence of the customer’s CFO nor e
nter themarket easily. It is like paying the Mafia.In December 1999, Dun & Bradstreet
announced that they would split into twobusinesses.
was selling for $27 a share and you were going to get ½ a share of
andwe assume in a worst case scenario that one share of D&B was worth $15 so the half sharewas at $7.5 per share. You were effectively paying $24 a share. At the time, I expected
to earn $0.95 per share in 2000.
: At the time we had no idea where Dun &Bradstreet would trade, so the $7.50 we were usingwas very conservative, so we thought this was a worst case of what we were paying.
Price $5 $20.25EPS $0.33 $0.85