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Financial Education Association
Berkshire Hathaway’s Acquisition of Precision Castparts

Author(s): Susan White, David Kass and Ryan Guttridge
Source: Journal of Financial Education , WINTER 2019, Vol. 45, No. 2 (WINTER 2019), pp.
322-353
Published by: Financial Education Association
Stable URL: https://www.jstor.org/stable/10.2307/48632895
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Berkshire Hathaway’s Acquisition
of Precision Castparts
Susan White
University of Maryland
David Kass
Ryan Guttridge
Investment titan Warren Buffett had added Precision Castparts (PCC) to

Berkshire Hathaway’s portfolio of companies. Since it was a cash deal
PCC shareholders could reinvest in Berkshire if desired or move on to
other investments. The case protagonist is not sure if Berkshire Hathaway
is paying a fair price for PCC. The case explores the industry outlook at the
time of the acquisition and Berkshire Hathaway’s and PCC’s past history.
The case includes details of the negotiation from PCC, information about
how Warren Buffett makes investment decisions and information about
valuing PCC. It is both an exercise in corporate valuation and in investing
strategies.
Keywords: Valuation, mergers and acquisitions, investing strategies
Berkshire Hathaway’s Acquisition of Precision Castparts
Daniel Anderson thought he was in a good financial position. He graduated

from college a few years ago, had a job he liked in a bank and paid off his student
loans thanks to an inheritance from his aunt. Part of that inheritance included
500 shares of Precision Castparts (PCC). Berkshire Hathaway had announced, in
August 2015, its intention to buy PCC. While Daniel knew he was far from being
an expert, one of his classes in college was an elective about Warren Buffett and
Berkshire Hathaway’s valuation methods and strategy. Was Precision Castparts
well-priced? Should he take the money from the sale of PCC and run, or was
this a good time to keep investing in PCC by taking the proceeds of the sale and
investing in Berkshire Hathaway? This acquisition was expected to be completed
in late January 2016.
322 Journal of Financial Education

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PRECISION CASTPARTS—PAST AND PRESENT
Headquartered in Portland, Oregon, Precision Castparts was an international

diversified manufacturer of metal components and products for aerospace companies,
power generation and general industry. PCC led the market in manufacturing large
structural castings, airfoil castings for the aerospace and gas turbine markets,
forged components, aerostructures, and fasteners for aerospace applications. PCC
also manufactured extruded seamless pipe, fittings, forgings and other products for
power generation and oil and gas applications, commercial and military airframe
aerostructures and metal alloys and other casting and forging materials.
Founded in 1956 as an offshoot of the Oregon Saw Chain Co., PCC grew from
a small manufacturer of investment castings to a Fortune 500 company producing
a large variety of metal components. PCC was led only by three chief executive
officers in its entire history: Ed Cooley, Bill McCormick and Mark Donegan.
Cooley started out as assistant general manager for Oregon Saw Chain, moved to
division head of the Precision Castparts division in 1953 and became CEO of the
spun off company in 1956. The firm pushed to make increasingly larger castings,
winning a General Electric contract for US Air Force engine components in 1967.
PCC went public in 1968, with 120,000 shares purchased by 1,100 shareholders.
At this time the company added titanium castings to its existing product line of
nickel and stainless steel castings. PCC grew through acquisitions, purchasing a
titanium foundry in France in 1985. Then, the firm’s purchase of TRW’s airfoils
business doubled the size of the company.
Bill McCormick, formerly from General Electric, joined PCC in 1985 as
president and chief operating officer, becoming CEO in 1991. Future CEO Mark
Donegan, also from General Electric, joined PCC as a supervisor in the Portland
casting operation. In 1991, McCormick faced a poorly performing commercial
aircraft industry, which led to cancelled orders for PCC. (At the time, 80% of PCC’s
business was aircraft/aerospace.) McCormick initiated a string of diversifying
acquisitions in the machine tool and fluid management industries. McCormick
also added gas turbine manufacturing to the aircraft component business. The gas
turbine market share climbed from zero in 1995 to over 50% of the market by
2001. PCC added engine forgings to its lineup with the acquisition of Wyman-
Gordon, then the world’s leader in producing this product.
In 2001, Donegan became President and CEO of PCC. Donegan concentrated
on cutting costs and adding new customers, for example, offering major aerospace
firms lower pricing in exchange for longer term contracts. In 2003, the firm
bought SPS Technologies, a fastener manufacturer, followed by the purchase of
five additional fastener companies and the purchase of Special Metals in 2006, an
acquisition that gave PCC its in-house metals producer. At the time of its purchase
by Berkshire Hathaway, PCC had 30,500 employees in 162 manufacturing
locations.
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PRECISION CASTPARTS AND ITS INDUSTRIES
Precision Castparts operated in two major industries: Aerospace and Power

Generation.
Aerospace
The aerospace industry included production and services for commercial

and military aircraft. Commercial aircraft manufacturing included building
civil aircraft, making prototypes of aerospace products, and propulsion system
overhauling. Military and aerospace included building military aircraft, missiles
and space vehicles. Aircraft manufacturing had long lead times, making it easier
for this industry to avoid economic slowdowns; in other words backlogged orders
allowed manufacturers to continue even in poor economic periods. Commercial
aircraft manufacturing benefited from airlines which had updated aging fleets
and from surges in travel demand in Asia, the Middle East, and Latin America.
Commercial aircraft manufacturing boasted a return on invested capital of 7.4%
in 2015.
Military aircraft and aerospace, on the other hand, had not done as well in
2015 due to smaller Western defense budgets following the recession in the mid-
2000s. Some of this decline was countered by greater demand for military aircraft
in emerging markets. Military aircraft manufacturing had returns of less than 1%
in 2015.
According to IBISWorld (2016), over the next five years, commercial
manufacturing was expected to produce above average returns. New competition
was expected to emerge adding pressure to existing manufacturers to maintain
market share. Potential concerns over the next five years were emerging market
economic slowdowns, oil prices, increasing interest rates, and possible oversupply.
Industry revenue growth was expected to grow at 4.1% annually to about $460
billion in the next five years. Military aircraft and aerospace were predicted to
grow at 3.1% annually to $300 billion over the next five years.
Aircraft parts and components accounted for the largest percentage of
commercial aircraft manufacturing revenue in 2015 at 39.2%, with large aircraft
32.6% of revenues, aircraft engines 16.2%, regional aviation 9.3% and helicopters
2.7% of total revenues. In military aircraft and aerospace, aircraft accounted for
67.7% of revenues, missiles 24.9% and spacecraft 7.4%.
The industry was impacted by a high need for capital investment, and the
need for advanced technology, particularly in military and aerospace. Research
and development to improve design and efficiency was important in the industry,
with safety and emissions regulations impacting the industry, particularly in the
commercial sector.

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Power Generation
In the power generation industry, power is sold to regulated utilities and

wholesale electricity markets. There are five types of power: coal and natural
gas, nuclear, hydroelectric, wind, and solar. There are high barriers to entry in
the industry because of regulations and high capital needs. The power generation
industry produced $146.9 billion in revenue for 2015, with coal and natural gas
power producing $96.2 billion in revenue, nuclear power $34.8 billion, wind
power $9 billion, hydroelectric power $3.7 billion and solar power $3.2 billion.
In the past five years, revenues for coal and natural gas, nuclear, and hydroelectric
power decreased slightly because of lower industrial production, stable electricity
prices, droughts that limited water flow and concerns for the environment and
safety. Growth in wind and solar power was spurred by government incentives and
a desire for renewable energy sources. Wind power experienced a 12.8% growth
and solar power 75.9% growth.
According to IBISWorld, in the next five years, coal and natural gas power
revenue was estimated to grow 1.4% annually, with a shift away from coal and
toward natural gas. Nuclear power was expected to grow a 0.9% annually, wind
power 4.9%, hydroelectric and solar power each 6.5%. Solar power was predicted
to cost the same as the retail rate of existing grid power in some areas, which meant
there would be less dependence on government assistance.
The power generating industry market consisted of consumers (45% of the
market), commercial users (37%), and industrial (17%). Most trade occurred
because of an imbalance between electricity demand and supply, with the exception
of fossil fuels used in power generation, which could be shipped where needed.
The market for electricity was relatively stable. The industry was heavily regulated
in terms of prices and allowable air pollution. Government policies impacted
funding for energy efficiency research and provided incentives to develop and use
renewable energy sources.
The outlook was positive for the power generation industry, with the overall
economy is expected to grow resulting in greater electricity needs. Coal and
natural gas power could be impacted by environmental concerns and governmental
regulations.
BERKSHIRE HATHAWAY AND WARREN BUFFETT
Berkshire Hathaway was founded in 1839, as a textile manufacturing

company. In May 1964, when the firm had a book value of about $19 per share,
CEO Seabury Stanton sent a letter to shareholders offering to buy 225,000 shares
(about 14% of the total shares) at $11.375 a share. The stock was then trading
at $9–$10. The Buffett Partnership Ltd. (BPL) owned about 7% of Berkshire
Hathaway’s outstanding shares. The Buffett Partnership was established in 1956
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when Warren Buffett was 25. He started with $100 of his own money, and raised
an additional $105,000 from friends and relatives, his father-in-law, sister, aunt,
college roommate and his roommate’s mother and a childhood friend.
Almost all of Buffett’s personal net worth was tied up in those shares. Shortly
before the tender offer was made, Stanton had offered to pay Buffett $11.50 per
share for his 7%. Even though Berkshire was a company in the declining textile
industry, Buffett refused the tender offer because he felt he was being cheated
by 1/8 of a point. Instead, he began to buy more shares until he was able to take
control of the company by April 1965 and then fire Stanton. Buffett’s retaliatory
behavior resulted in 25% of BPL’s capital being invested in a poorly performing
business about which he knew little.
In 1967, Berkshire paid $8.6 million to buy National Indemnity Company
(NICO), a small but profitable Omaha-based insurer. Insurance was in Buffett’s
sweet spot since he understood and liked the industry. He then opted to merge
NICO with his 61%-owned declining business (Berkshire Hathaway). In 1985,
Buffett shut down the textile business but retained the corporate name of Berkshire
Hathaway. The property casualty branch of the insurance industry had been the
engine that has propelled Berkshire’s expansion since 1967. Since premiums
were received before claims were paid, Berkshire used this “float” along with
underwriting profits to grow the company through investments and acquisitions.
The subsequent acquisition of GEICO and entry into the reinsurance business, in
part through the purchase of General Re, substantially added to Berkshire’s stake
in this industry. As of December 31, 2015, Berkshire Hathaway had acquired
approximately 80 companies within its four major sectors of operations. The
acquisition of PCC will be an additional to what Buffett refers to as his Powerhouse
5. Those business are listed in Table 1.
At year-end 2015, Berkshire Hathaway’s investments, primarily consisting of
common stock, had a market value of $112 billion. This represented approximately
20% of its total assets of $552 billion. In Berkshire’s earlier years, its common
stock portfolio represented a much larger percentage of total assets. For example,
as recently as 1994, Berkshire’s equity securities equaled 76% of total assets. Its
relative share had declined over time, as Berkshire has made major acquisitions.
Warren Buffett’s acquisition and investment strategy had emphasized
companies that he believed possessed durable competitive advantages which
would result in both pricing power and acceptable levels of profitability. Buffett
was quoted as saying, “It’s far better to buy a wonderful company at a fair price
than a fair company at a wonderful price. Charlie understood this early; I was a
slow learner.”
Buffett sought to acquire businesses selling below his estimate of “intrinsic
value”, which in turn would provide a “margin of safety” as described by his mentor
Ben Graham, author of “The Intelligent Investor”. Buffett outlined his investing
strategy in his letter to shareholders in Berkshire Hathaway’s 2013 annual report.

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Table 1. Select Berkshire Hathaway Companies (Powerhouse 5).
Acquisition
Revenues Major Sectors of Operations Dates
20% Insurance
19% Regulated Capital Intensive
BNSF (Burlington Northern Santa Fe Railroad 2010
MidAmerican Energy (previously Berkshire Hathaway
Energy
51% Manufacturing, Service and Retailing Operations
IMC (formerly Iscar) 2006
TTI 2007
Marmon 2007
Lubrizol (lubricants) 2011
Precision Steel Warehouse (part of Wesco Financial) 2011
3% Finance and Financial products
7% Investment/Dividend income
Total: 100%
Source: Berkshire Hathaway 10K, 2017
In brief, he looked at the return on investment and the basics of the business and
made his decision, rather than relying on complex models. The letter is excerpted
in Appendix A.
Berkshire Hathaway had stockpiled about $100 billion in cash. It was particularly
difficult to find companies large enough to have an impact on Berkshire Hathaway’s
bottom line. According to analyst Jonathan Brandt, quoted in the Washington Post,
Buffett needed to make multibillion dollar acquisitions: “He (Warren Buffett) does
buy companies that are worth less than a billion, but it doesn’t really move the
needle…it’s just hard to get a really good, cheap multiple on something that big,”
for example, as large as Berkshire’s acquisition of Burlington Northern Santa Fe
Corp., a $44 billion purchase made in 2010 (Heath, 2017). Larger companies were
generally well followed by analysts, potentially making their stock price more
accurate because more information and analysis was available for these companies.
Berkshire Hathaway had also purchased private companies, including Pampered
Chef and Helzberg Diamonds, sometimes at a discount from owners who wanted
to keep their companies intact and part of Berkshire Hathaway.
THE PCC ACQUISITION
Berkshire Hathaway (BRK) had first expressed interest in PCC four years
earlier, with open market share purchases in August 2012. The open market
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purchases continued until the merger agreement was signed in August 2015.
By this time Berkshire owned 2,695,109 shares, or approximately 2% of the
outstanding shares, and pension funds of Berkshire subsidiaries owned 1,505,683
shares, or approximately 1.1% of the outstanding shares. Prior to the agreement, in
mid-March 2015, PCC’s head of Investor Relations received a request from Todd
Combs, an investment manager at Berkshire, to have an introductory conversation
with Mark Donegan, PCC’s Chairman and Chief Executive Officer. When Combs
and Donegan spoke, they discussed PCC’s business, and Combs asked that PCC
keep Berkshire in mind when scheduling trips to visit investors.
The first meeting with Berkshire occurred on July 1, 2015, as part of a trip
that included a meeting with another investor. At the Berkshire meeting, CEO
Donegan, PCC’s Chief Financial Officer and head of Investor Relations met with
Combs, at Berkshire headquarters in Omaha, Nebraska. Buffett joined them for the
second half of the meeting, where they discussed PCC’s performance, markets and
financial guidance but not any potential acquisition of the firm.
The next day, Combs called Donegan to tell him that Berkshire would be
interested in making a proposal to acquire PCC, but only if PCC was willing.
Donegan discussed the potential offer with his Board of Directors and with the
advice of representatives of Cravath, Swaine & Moore LLP (Cravath) and Credit
Suisse, firms that had previously been retained by PCC in connection with general
corporate matters. The Board chose to move ahead with discussions with Berkshire.
Donegan met with Buffett in Sun Valley, Idaho on July 9. Buffett offered a
price of $235 per share in cash, which was 24% higher than the market price of
$190 on that day. With 137.58 million PCC shares outstanding, this represented a
value of about $32.3 billion for PCC’s equity. Interestingly, Buffett said the offer
was not subject to due diligence, any financing condition or regulatory risks; in
other words, if PCC accepted, the transaction would take place. Berkshire wanted
Donegan to remain with PCC if the purchase occurred.
On July 21, 2015, the Board decided that the price and high degree of closing
certainty offered by Berkshire merited further engagement, and authorized Donegan
to see if Berkshire would increase the value of its proposal. Buffett indicated that
$235 per share in cash was his final offer and represented an EBITDA multiple
much greater than any past Berkshire acquisition.
Using the services of Credit Suisse, the Board considered looking for other
potential acquirers. No other company came to mind, and a full search risked a leak
to Buffett. Buffett had stated that Berkshire avoided auctions for the companies it
was interested in purchasing, and would likely back out if PCC encouraged other
suiters. The Board decided to pursue Berkshire’s offer of $235/share and not seek
out other bids; however, they would entertain other offers if anything developed
after the merger announcement was made. This meant that it was in PCC’s interest
to negotiate a deal with a minimal termination fee that would be payable by an
alternative acquirer if one emerged.

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On July 30, Donegan confirmed that PCC would accept the offer, and that he
was willing to continue as PCC’s CEO, with the deal finalized on August 7. The
termination fee was hotly negotiated, with Berkshire proposing a termination fee
of $1 billion, about 3.1% of PCC’s equity value. PCC countered with a fee of
$158 million, about 0.5% of PCC’s value. The two parties settled on a fee of $600
million, about 1.9% of PCC’s value.
On August 8, 2015, the Wall Street Journal (Mattioli, 2015) published a story
speculating that Berkshire was close to announcing an acquisition of PCC, with
transaction value greater than $30 billion. Later that day, the Board met to discuss
the finalized terms, with Credit Suisse providing a fairness opinion concerning the
price Berkshire offered for PCC. The Board unanimously approved the merger
agreement as being in the best interests of PCC. On August 10, before trading
began on the NYSE, PCC and Berkshire issued a joint press release announcing
merger agreement.
PCC BOARD’S CONSIDERATIONS
The Board’s reasons for accepting the merger included the following. First, the
$235 per share cash price represented a premium of about 21.2% over the closing
price of the Company common stock on August 7, 2015, which was the last trading
day prior to the Board’s approval of the merger agreement. It also represented
a valuation of the Company at a multiple of 12.3 times PCC’s EBITDA for the
12-month period ended June 28, 2015. PCC management had provided additional
information to the Board, including a multi-year forecast. Business risks included:
• A slowdown in China or other key markets

• Depressed oil prices. This could impact PCC through decreased demand
for equipment in the oil and gas industry or in the aerospace industry,
where high oil prices drove demand for the development of more fuel-
efficient aircraft engines.
• A potential downward shift in the aerospace business cycle and a potential
slowdown in the market for industrial gas turbine engines.
A benefit to the deal was that it was all cash, and therefore very easy to
assess the value for PCC shareholders. On the other hand, all cash meant that
PCC shareholders would need to pay taxes on their gain. Berkshire also had an
excellent track record in its prior acquisitions. The Board noted that Berkshire
had the financial strength—and the cash—to make the purchase and follow
through. Berkshire also had a reputation for preserving jobs and allowing acquired
companies to continue to operate post-merger as they had operated pre-merger.
The merger shifted operating risks to Berkshire, but also meant that former PCC
shareholders would not share in future gains if the merger was successful.
Winter 2019 329

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PROSPECTIVE FINANCIAL INFORMATION
Daniel was in a good position financially, with his immediate needs handled,
although not luxuriously, by his salary. He had no other stock holdings, other than
his inherited stock, but he invested regularly in a 401K plan. Daniel wanted to
invest for his future. Daniel thought it would be useful to look at both PCC and
Berkshire Hathaway financial statements (Tables 2 and 3). Forecasts based on
historical data are contained in Table 4. In addition, PCC provided information
to the board. These forecasts were given to Credit Suisse but not to Berkshire
Hathaway. The Company/May forecasts and Management/July forecasts are
in Table 5. PCC management-prepared forecasts were made in July 2015, and
were updates of the May Forecasts. The forecasts contained PCC’s most up-to-
date financial information, including business results through the first quarter
of fiscal year 2016 and the impact of recent acquisitions. The forecast assumed
there would not be additional future acquisitions. The economic forecast was also
revised to show a more modest growth in the industrial gas turbines end market.
Prior to preparing the July report, management prepared May Forecasts assuming
no acquisitions and a $1 billion issuance of bonds. Management also provided
information about companies comparable to PCC and comparable transactions,
shown in Table 6. Information about PCC competitors is in Table 7, with competitor
ratios in Table 8. Market information is contained in Table 9. The five-year return
of Berkshire Hathaway Class B shares was 16.3% vs. 9.3% for the S&P 500. Table
10 has past monthly PCC stock prices. The previous 52-week high was $249,
which was greater than Berkshire offers. Daniel noted that 52 week highs and lows
are frequent financial news headlines, and can sometimes become a rallying cry
when there was talk of an acquisition, with many deals equaling or exceeding the
previous 52 week high for the acquired firm.
Daniel had carefully examined PCC’s SEC required 14A form about the
merger, and studied Berkshire Hathaway’s financial statements, as well as Warren
Buffett’s investing strategy. Would PCC prosper as a part of Berkshire Hathaway?
Was Berkshire Hathaway underpaying or overpaying for PCC, or was it simply
paying a fair price for a good company, as Buffett wanted to do? Should Daniel
stay the course with Berkshire Hathaway or invest elsewhere?
TTI: TTI was a distributor for industrial, military, aerospace and consumer
electronics manufacturers, worldwide. It provided personalized service and custom
supply chain solutions, using its 55,000 square foot distribution center.
Precision Steel, Inc. (PSW): PSW was a steel service center and distributor of
steel parts, offering custom processing, statistical process control, electronic data
interchange and bar coding.

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Table 2. Precision Castparts Financial Statements.
PRECISION CASTPARTS CORP
In millions Apr 1, Apr 1, Apr 1, Apr 1, Apr 1,
Consolidated Income
Statement 2011 2012 2013 2014 2015
Net sales 6,208.70 7,201.9 8,347.0 9,533.0 10,005.0
Gross profit
COGS 4,154.4 4,769.8 5,440.0 5,961.0 6,427.0
D&A 163.8 169.8 214 292 325
Selling and
administrative expenses 389 446.4 534.0 621.0 641.0
Restructuring expense 0.0 0.0 0.0 8.0
Interest expense 13.5 12.8 38.0 76.0 69.0
Interest income (4.5) (7.6) (7.0) (5.0) (4.0)
Total operating expense 4,716.2 5,391.2 6,219.0 6,945.0 7,466.0
Earnings before
interest and taxes
(Operating Profit) 1,492.5 1,810.7 2,128.0 2,588.0 2,539.0
Interest income 4.5 7.6 7.0 5.0 4.0
Interest expense 13.5 12.8 38.0 76.0 0
Earnings before taxes 1,483.5 1,805.5 2,097.0 2,517.0 2,474.0
Income tax expense (499.7) (594.0) (695.0) (830.0) (816.0)
Equity in earnings
unconsolidated
affiliates 16.6 14.6 0.6 1.0 (175.0)
Total other income
(expense), net (483.1) (579.4) (694.4) (829.0) (991.0)
Net income from
continuing operations 1,009.4 1,231.3 1,433.6 1,759.0 1,548.0
Net (loss) income 25 (15)
discontinued operations 4.1 (5.5) (4.0)
Net income 1,013.5 1,225.8 1,429.6 1,784.0 1,533.0
Net income to
noncontrolling interest (1.3) (1.7) (3.0) (7.0) (3.0)
Net income
attributable to PCC 1,012.2 1,224.1 1,426.6 1,777.0 1,530.0

Winter 2019 331

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Table 2. (Continued).
Net income per share:
Basic 7.10 8.48 9.79 12.20 10.73
Diluted $ 7.04 8.41 9.72 12.12 10.66

Number of shares used in per share calculations:
Basic 142.700 144.400 145.700 145.600 142.600
Diluted 143.900 145.600 146.700 146.600 143.500
PRECISION CASTPARTS CORP

As of
In millions Apr 1, Apr 1, Apr 1, Apr 1, Apr 1,
Consolidated Balance
Sheet 2011 2012 2013 2014 2015
Assets:
Cash and cash
equivalents $1,159.0 $698.7 $280.2 $361.0 $474.0
Receivables $978.7 $1,186.4 $1,509.3 $1,568.0 $1,710.0
Inventories $1,459.4 $1,815.3 $2,981.8 $3,426.0 $3,640.0
Prepaid expenses and
other current assets $21.0 $29.4 $159.3 $105.0 $81.0
Income tax receivable $20.0 $7.8 $5.0 $5.0 $37.0
Deferred income taxes $0.0 $101.4 $13.0 $2.0
Discontinued
operations $12.5 $48.2 $43.2 $29.0 $28.0
Total current assets $3,650.6 $3,785.8 $5,080.2 $5,507.0 $5,972.0
Property, plant and
equipment:
Land $86.2 $91.2 $137.8 $169.0 $192.0
Buildings and
improvements $332.6 $357.3 $464.3 $523.0 $578.0
Machinery and
equipment $1,856.0 $2,015.2 $2,671.6 $2,988.0 $3,234.0
Construction in
progress $85.4 $144.8 $256.6 $298.0 $324.0
Property, plant and
equipment, gross $2,360.2 $2,608.5 $3,530.3 $3,978.0 $4,328.0
Accumulated
depreciation $1,165.4 $1,286.3 $1,441.1 $1,678.0 $1,854.0

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Net property, plant and
equipment $1,194.8 $1,322.2 $2,089.2 $2,300.0 $2,474.0
Goodwill $2,889.2 $3,514.3 $5,906.7 $6,613.0 $6,661.0
Acquired intangible
assets, net $455.1 $1,228.1 $3,030.4 $3,440.0 $3,744.0
Investment in
unconsolidated
affiliates $411.9 $442.8 $445.4 $416.0 $238.0
Other assets $309.0 $195.4 $300.1 $262.0 $311.0
Discontinued
operations $45.3 $70.2 $44.0 $48.0 $28.0
Total noncurrent assets $5,305.3 $6,773.0 $11,815.8 $13,079.0 $13,456.0
Total assets $8,955.9 $10,558.8 $16,896.0 $18,586.0 $19,428.0
Liabilities:
Long-term debt
currently due $14.7 $0.5 $204.0 $2.0 $1,093.0
Accounts payable $607.8 $713.7 $941.0 $1,039.0 $1,162.0
Accrued liabilities $304.0 $335.0 $552.2 $554.0 $559.0
Deferred income taxes $9.3 $1.4 $0.0 $0.0
Discontinued
operations $6.2 $20.3 $14.4 $13.0 $13.0
Total current liabilities $942.0 $1,070.9 $1,711.6 $1,608.0 $2,827.0
Long-term debt $221.9 $207.7 $3,603.2 $3,569.0 $3,493.0
Pension and other benefit
obligations $252.5 $358.9 $548.3 $442.0 $678.0
Other long-term liabilities $180.6 $279.6 $456.5 $598.0 $546.0
Deferred income taxes $194.4 $259.1 $761.4 $950.0 $924.0
Discontinued operations $0.0 $17.8 $10.6 $6.0 $3.0
Total noncurrent liabilities $849.4 $1,123.1 $5,380.0 $5,565.0 $5,644.0
Total liabilities $1,791.4 $2,194.0 $7,091.6 $7,173.0 $8,471.0
Shareholder’s equity:
Preferred stock $0.0 $0.0 $0.0 $0.0 $0.0
Common stock $143.7 $145.3 $146.2 $145.0 $139.0
Paid-in capital $1,455.7 $1,653.6 $1,776.8 $1,487.0 $60.0
Retained earnings $5,796.7 $7,003.5 $8,412.6 $10,172.0 $11,685.0
Accumulated other loss $234.6 $441.7 $552.2 $418.0 $955.0
Noncontrolling interest $3.0 $4.1 $21.0 $27.0 $28.0
Winter 2019 333

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Total shareholder’s equity $7,164.5 $8,364.8 $9,804.4 $11,413.0 $10,957.0
Total liabilities/
shareholder’s equity $8,955.9 $10,558.8 $16,896.0 $18,586.0 $19,428.0
Revenue by segment 2011 2012 2013 2014 2015

Investment Cast Products 2,096 2,327 2,480 2,462 2,536
%growth rate 11.04% 6.58% 0.73% 3.01%
Forged Products 2,768 3,177 3,552 4,189 4,259’
%growth rate 14.76% 11.81% 17.93% 1.67%
Airframe Products 1,345 1,698 2,315 2,882 3,210’
%growth rate 26.28% 36.32% 24.49% 11.38%
Total 6,209 7,202 8,347 9,533 10,005
%growth rate 16.00% 15.90% 14.21% 4.95%
done
Revenue by segment 2011 2012 2013 2014 2015
Investment Cast Products 2,096 2,327 2,480 2,462 2,536
%growth rate 11.04% 6.58% -0.73% 3.01%
Forged Products 2,768 3,177 3,552 4,189 4,259
%growth rate 14.76% 11.81% 17.93% 1.67%
Air frame Products 1,345 1,698 2,315 2,882 3,210
% growth rate 26.28% 36.32% 24.49% 11.38%
Total 6,209 7,202 8,347 9,533 10,005
% growth rate 16.00% 15.90% 14.21% 4.95%
Table 3. Berkshire Hathaway Financial Statements.

12 Months Ended
Berkshire Hathaway Income State- Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
ment—USD ($) $ in Millions 2011 2012 2013 2014 2015
Total revenues 143,688 162,463 182,150 194,673 210,821
Costs and expenses:
Interest expense 2,801 3,253 3,515
Total costs and expenses 128,374 140,227 153,354 166,568 175,875
Earnings before income taxes 15,314 22,236 28,796 28,105 34,946
Income tax expense 4,568 6,924 8,951 7,935 10,532
Net earnings 10,746 15,312 19,845 20,170 24,414
Less: Earnings attributable to 492 488 369 298 331
non controlling interests

145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC
12 Months Ended
Net earnings attributable to
Berkshire Hathaway shareholders 10,254 14,824 $ 19,476 $ 19,872 $ 24,083
Class A [Member]
Net earnings per share attributable to
Berkshire Hathaway shareholders:
Net earnings per share attributable to
Berkshire Hathaway shareholders $6,215 $8,977 $ 11,850 $ 12,092 $ 14,656
Average equivalent Class A shares
1,649,891 1,651,294 1,643,613 1,643,456 1,643,183
outstanding
Insurance and Other [Member]
Revenues:
Insurance premiums earned 32,075 34,545 $ 36,684 $ 41,253 $ 41,294
Sales and service revenues 72,803 83,268 92,993 97,097 107,001
Interest, dividend and other investment
income 4,792 4,534 4,934 5,026 5,235
Investment gains/losses 1,065 990 3,881 3,503 9,363
Total revenues 110,735 123,337 138,492 146,879 162,893
Costs and expenses:
Insurance losses and loss adjustment
20,829 20,113 21,275 26,406 26,527
expenses
Life, annuity and health insurance
benefits 4,879 5,114 5,072 5,181 5,413
Insurance underwriting expenses 6,119 7,693 7,248 6,998 7,517
Cost of sales and services 59,839 67,536 75,953 78,873 87,029
Selling, general and administrative
expenses 8,670 10,503 11,732 12,198 13,723
Interest expense 308 397 395 419 460
Railroad, Utilities and Energy
[Member]
Revenues:
Total revenues 30,839 32,582 34,757 40,690 40,004
Costs and expenses: ‘ ‘
Cost of sales and operating expenses 22,736 23,816 25,157 29,378 27,650
Interest expense 1,703 1,745 1,865 2,378 2,653
Winter 2019 335

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12 Months Ended
Finance and Financial Products ‘ ‘
Revenues: ‘ ‘
Sales and service revenues 2,391 2,537 4,635 5,094 5,430
Interest, dividend and other investment
income 1,618 1,572 1,474 1,432 1,510
Investment gains/losses 209 472 184 72 10
Derivative gains/losses 2,104 1,963 2,608 506 974
Total revenues 2,114 6,544 8,901 7,104 7,924
Costs and expenses: ‘ ‘
Cost of sales and services 2,566 2,758 2,915
Selling, general and administrative
expenses 2,638 2,708 1,550 1,523 1,586
Interest expense 653 602 541 456 402
Total costs and expenses $3,291 $3,310 $ 4,657 $ 4,737 $ 4,903
12 Months Ended
Berkshire Hathaway Income Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Statement—USD ($) $ in Millions 2011 2012 2013 2014 2015
ASSETS
Cash and cash equivalents $37,299 $46,992 $48,186 $ 63,269 $ 71,730
Investments in fixed maturity securities 37,550 27,636 26,027
Investments in equity securities 76,991 88,346 117,505 117,470 111,822
Inventories 8,975 9,675 9,860 10,236 11,916
Goodwill 53,213 54,523 57,011 60,714 62,708
Total assets 392,647 427,452 484,931 525,867 552,257
LIABILITIES ‘
Income taxes, principally deferred 37,804 44,494 57,739 61,235 63,126
Total liabilities 223,686 235,864 260,446 282,840 293,630
Shareholders’ equity: ‘
Common stock 8 8 8 8 8
Capital in excess of par value 37,807 37,230 35,472 35,573 35,620

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12 Months Ended
Accumulated other comprehensive
17,654 27,500 44,025 42,732 33,982
income
Retained earnings 109,448 124,272 143,748 163,620 187,703
Treasury stock, at cost 67 1,363 1,363 (1,763) (1,763)
Berkshire Hathaway shareholders’
164,850 187,647 221,890 240,170 255,550
equity
Noncontrolling interests 4,111 3,941 2,595 2,857 3,077
Total shareholders’ equity 168,961 191,588 224,485 243,027 258,627
Total liabilities and shareholders’ 525,867 552,257
equity 392,647 427,452 484,931
Insurance and Other [Member]

ASSETS
Cash and cash equivalents 33,513 42,358 42,433 57,974 61,181
Investments in fixed maturity securities 31,222 36,708 28,785 27,397 25,988
Investments in equity securities 76,063 87,081 115,464 115,529 110,212
Other investments 13,111 10,184 12,334 16,346 15,998
Investments in The Kraft Heinz Com- 11,660 23,424
pany 12,111
Receivables 19,012 21,753 20,280 21,852 23,303
Inventories 8,975 9,675 9,860 10,236 11,916
Property, plant and equipment 18,177 19,188 13,623 14,153 15,540
Goodwill 32,125 33,274 33,067 34,959 37,188
Other intangible assets 9,203 9,148
Deferred charges reinsurance assumed 7,772 7,687
Other 18,121 17,875 19,113 6,748 6,697
Total assets 250,319 278,096 307,070 333,829 348,282
LIABILITIES
Losses and loss adjustment expenses 63,819 64,160 64,866 71,477 73,144
Unearned premiums 8,910 10,237 10,770 11,944 13,311
Life, annuity and health insurance 13,261 14,497
benefits 9,924 10,943 11,681
Winter 2019 337

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12 Months Ended
Other policyholder liabilities 6,835 7,123
Accounts payable, accruals and other 16,472 17,879
liabilities 18,466 21,149 21,979
Notes payable and other borrowings 13,768 13,535 12,440 11,854 14,599
Railroad, Utilities and Energy [Member]

‘
ASSETS
Property, plant and equipment 82,214 87,684 102,482 115,054 120,279
Goodwill 20,056 20,213 22,603 24,418 24,178
Regulatory assets 4,253 4,285
Other 12,861 13,441 16,149 11,817 12,833
Total assets 117,377 123,908 144,634 158,543 165,012
LIABILITIES
liabilities
Regulatory liabilities 13,016 13,113 14,557 2,832 3,033
Finance and Financial Products

[Member]
ASSETS
Investments in fixed maturity securities 966 842 239 39
Investments in equity and fixed maturi- 1,299 411
ty securities 3,810 1,432 1,506
Investments in equity securities 590 938 1,060 372
Other investments 4,882 5,617 5,978 5,719
Loans and finance receivables 13,934 12,809 12,826 12,566 12,772

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12 Months Ended
Property, plant and equipment and 8,037 9,347
assets held for lease 7,700
Goodwill 1,032 1,036 1,341 1,337 1,342
Other 3,669 3,225 1,884 1,984 2,260
Total assets 24,951 25,448 33,227 33,495 38,963
LIABILITIES
liabilities 1,224 1,099 1,299
Derivative contract liabilities 10,139 7,933 5,331 4,810 3,836
Total liabilities $25,399 $22,077 $19,759 $ 18,861 $ 17,185
Market
Number of shares Price/share Value
A shares 1.643 213,500 350,781
B shares 2465 142.7 351,854
Total 702,635
Winter 2019 339

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Table 4. PCC Forecasted Financials—Historical.
340
Author-prepared using PCC financials
In millions
Period 0 1 2 3 4 5 6 7 8 9 10
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 10,005 10,605 11,242 11,916 12,631 13,389 14,192 15,044 15,946 16,903 17,917
Year over year growth 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06
Cost structure
COGS,net D&A 6,825 6,943 7,359 7,801 8,269 8,765 9,291 9,848 10,439 11,065 11,729
% of revenue 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65
SG&A 641 717 760 805 854 905 959 1,017 1,078 1,142 1,211
% of revenue 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07
EBITDA 2,539 2,946 3,123 3,310 3,509 3,719 3,942 4,179 4,430 4,695 4,977
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Income tax expense (816) (842) (893) (946) (1,003) (1,063) (1,127) (1,195) (1,267) (1,343) (1,423)
% of EBITDA 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29

Current Assets 6,458 6,183 6,554 6,947 7,364 7,806 8,274 8,771 9,297 9,855 10788
Current Liabilities 4,756 4,356 4,766 5,052 5,356 5,677 6,018 6,379 6,761 7,167 7658
Capital Expenditures 702 392.40 415.94 440.90 467.35 495.39 425.77 451.31 478.39 507.10 537.52
Depreciation 325 311 329 349 370 392 416 441 467 495 525
Share Count (Diluted) 143.5
Journal of Financial Education

Table 5 Company Filing Forecasts
Winter 2019
Panel A: PCC May Forecasts
Source: PCC financial filings
In millions
Period 0 1 2 3 4 5 6 7 8 9 10
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 10,005 10,323 10,993 11,913 12,897 13,346 14,147 14,996 15,895 16,849 17,860
COGS,net D&A 6,825 6,545 6,958 7,514 8,097 8,364 8,866 9,398 9,962 10,559 11,193
% of revenue 641.00 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63
SG&A 641 698 743 805 872 902 956 1,013 1,074 1,139 1,207
% of revenue 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07
EBITDA 2,539 3,080 3,292 3,594 3,928 4,080 4,325 4,584 4,859 5,151 5,460
145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC

Income tax expense (816) (881) (941) (1,028) (1,123) (1,167) (1,237) (1,311) (1,389) (1,473) (1 561)
% of E BITDA 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29

Current Assets 6,458 6,046 7,386 7,996 8,275 8,771 9,297 9,855 10,446 11,073 12487
Depreciation 325 349 357 358 368 380 414 439 465 493 523
Capital Expenditures 702 382 407 441 477 494 523 555 588 623 661
Number of shares 143.5
341
342
Panel B
PCC July Forecasts
In Millions
Period 0 1 2 3 4 5 6 7 8 9 10
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 10,005 10,858 12,454 14,344 16,489 18,087 19,172 20,323 21,542 22,834 24,204
COGS,net D&A 6,825 6,861 7,931 9,167 10,538 11,582 12,276 13,013 13,794 14,621 15,499
% of revenue 0.63 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64 0.64
SG&A 641 734 842 969 1,114 1,222 1,296 1,374 1,456 1,543 1,636
% of revenue 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07
EBITDA 2,539 3,263 3,681 4,208 4,837 5,283 5,600 5,936 6,292 6,670 7,070
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Income tax expense (816) (933) (1 ,053) (1,203) (1,383) (1,511) (1,601) (1,697) (1,799) (1,907) (2,021)
% of EBITDA 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29
Current Assets 6,458 6,850 8,893 10,223 11,214 11,887 12,600 13,356 14,157 15,007 15301
Depreciation 325 349 357 358 368 380 561 595 631 669 709
Capital Expenditures 702 1,086 1,245 1,434 1,649 1,809 575 610 646 685 726
Number of shares 143.5
Journal of Financial Education

Table 6. Comparable Information.
Panel A
Comparable Company Information
Enterprise Value /
CY 2015E CY 2016E
EBITDA EBITDA
Diversified Industrial Companies
United Technologies Corporation 9.0x 8.9x
Honeywell International Inc. 10.6x 10.0x
Eaton Corporation 10.6x 9.7x
Parker-Hannifin Corporation 9.4x 9.1x
Aerospace & Defense Companies

Rolls Royce Holdings plc 7.1x 7.8x
Rockwell Collins Inc. 10.4x 9.9x
GKN plc 6.5x 5.8x
Spirit AeroSystems Holdings, Inc. 7.5x 7.3x
Meggitt PLC 10.4x 9.7x
B/E Aerospace Inc. 12.1x 11.5x
Woodward, Inc. 10.9x 9.8x
Triumph Group, Inc. 7.2x 6.4x
Panel B
Selected Comparable Transactions
Enterprise
Date Value / LTM
Announced Acquirer Target EBITDA
7/2015 Solvay SA Cytec Industries Inc. 15.2x
3/2015 Alcoa Inc. RTI International Metals, Inc. 13.1x
6/2014 Alcoa Inc. Firth Rixson Limited 14.3x
5/2014 Warburg Pincus LLC Wencor Group, LLC 13.5x
5/2014 Cobham plc Aeroflex Holding Corp. 11.4x
8/2013 Rockwell Collins, Inc. ARINC Incorporated 11.1x
12/2012 General Electric Company Avio S.p.A. 8.5x
11/2012 Precision Castparts Corp. Titanium Metals Corporation 13.8x
7/2012 GKN plc Volvo Aero 6.3x
9/2011 United Technologies
Corporation Goodrich Corporation 12.7x
Winter 2019 343

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Panel B
Selected Comparable Transactions
Enterprise
Date Value / LTM
Announced Acquirer Target EBITDA
11/2010 Allegheny Technologies
Incorporated Ladish Co., Inc. 13.2x
9/2010 TransDigm Group
Incorporated McKechnie Aerospace Holdings Inc. 12.9x
1/2007 General Electric Company Smiths Aerospace 12.4x
Table 7 Competitor Information

Beta Revenues EBIT EBITDA Net Inco Tax Rate
United Technologies 1.11 56098 7750 9613 7608 33%
Corporation (UTX-US)
Honeywell International (HON- 1.06 38581 6806 7699 4768 26%
US)
Eaton (ETN-US) 1.54 20855 2342 3267 1979 32%
Parker-Hannifin (PH-US) 1.49 11360.8 1275 1582.1 806.8 29%
Rolls Royce Holdings (RR.-LN) 1.17 20929.5 2321 3556.1 126.6 25%
Rockwell Collins (COL-US) 0.73 5244 1008 1260 686 28%
GKN (GKN-LN) 1.32 7231 560 901 197 24%
Spirit AeroSystems Holdings 1.12 6643.9 863 1044.1 788 3%
(SPR-US)
Meggitt (MGGT-LN) 0.79 1647.2 247.2 401.7 182.1 20%
B/E Aerospace (BEAV-US) 1.09 2729.6 452.3 537.6 285.7 22%
Woodward (WWD-US) 1.23 2038.3 263.9 339.1 181.5 25%
Triumph Group (TGI-US) 1.45 3886.1 -176.3 1.5 -1048 32%
Total Long-term Shareho Stock Pri Number of

Debt Debt Equity 42369 Shares
United Technologies 20425 19320 27358 96.07 836.43
Corporation (UTX-US)
Honeywell International 12068 5554 18283 103.57 769.32
(HON-US)
Eaton (E1N-US) 8449 7781 15186 52.04 458.9
Parker-Hannifin (PH-US) 3037 2675 4575 96.98 135.1
Rolls Royce Holdings (RR.- 4870 4252.2 7395 575 183.87
LN)
Rockwell Collins (COL-US) 2128 1680 1875 92.3 131.13
GKN (GKN-LN) 1034 867 1863 308.4 1674.1

145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC
Total Long-term Shareho Stock Pri Number of
Debt Debt Equity 42369 Shares
Spirit AeroSystems Holdings 1133 1097.6 2120 50.07 135.52
(SPR-US)
Meggitt (MGGT-LN) 1199 1194.4 2179 374.7 775.17
B/E Aerospace (BEAV-US) 2034 2034.1 55.5 42.37 102.11
Woodward (WWD-US) 959.4 850 1153 49.66 61.916
Triumph Group (TGI-US) 1417 1374.9 934.9 39.75 49.329
Source: Bloomberg
Table 8: Market Information

Long term (20 year) US Treasury Bond Yield: 2.68%
Equity risk premium: 6.9%
Long-term growth rate: 1.5% (Source: http://www.econ.yale.edu/~shiller/data.htm)
Source: Duff and Phelps 2016 Valuation Handbook
Table 9. PCC Stock Prices.

05-Jan-2014 267.7900 04-Jan-2015 238.4400 03-Jan-2016 232.0100
12-Jan-2014 271.2200 11-Jan-2015 229.5500 10-Jan-2016 232.0700
19-Jan-2014 270.6200 18-Jan-2015 199.6300 17-Jan-2016 232.1100
26-Jan-2014 255.4600 25-Jan-2015 207.8500 24-Jan-2016 231.4800
02-Feb-2014 254.7500 01-Feb-2015 200.1000 31-Jan-2016 234.9500
09-Feb-2014 260.2000 08-Feb-2015 203.8100
16-Feb-2014 260.4400 15-Feb-2015 205.5400
23-Feb-2014 256.4000 22-Feb-2015 219.6100
02-Mar-2014 257.8800 01-Mar-2015 216.3000
09-Mar-2014 262.9600 08-Mar-2015 212.7100
16-Mar-2014 252.0700 15-Mar-2015 204.5900
23-Mar-2014 252.8000 22-Mar-2015 210.1600
30-Mar-2014 247.5800 29-Mar-2015 212.1800
06-Apr-2014 253.8400 05-Apr-2015 210.8000
13-Apr-2014 244.4100 12-Apr-2015 213.0000
20-Apr-2014 257.1800 19-Apr-2015 201.1500
27-Apr-2014 251.7000 26-Apr-2015 200.5100
04-May-2014 254.3300 03-May-2015 208.7800
11-May-2014 255.2800 10-May-2015 206.3600
Winter 2019 345

145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC
18-May-2014 240.2100 17-May-2015 215.4900
25-May-2014 249.0200 24-May-2015 219.6800
01-Jun-2014 252.9800 31-May-2015 211.6300
08-Jun-2014 272.7500 07-Jun-2015 211.0200
15-Jun-2014 265.6400 14-Jun-2015 207.9000
22-Jun-2014 265.6100 21-Jun-2015 210.7400
29-Jun-2014 254.3600 28-Jun-2015 203.2000
06-Jul-2014 254.8900 05-Jul-2015 199.0500
13-Jul-2014 255.8000 12-Jul-2015 190.8700
20-Jul-2014 257.3900 19-Jul-2015 193.4500
27-Jul-2014 232.8600 26-Jul-2015 188.6800
03-Aug-2014 229.2500 02-Aug-2015 194.9200
10-Aug-2014 233.8300 09-Aug-2015 193.8800
17-Aug-2014 239.6700 16-Aug-2015 230.5000
24-Aug-2014 242.9800 23-Aug-2015 230.8000
31-Aug-2014 244.0600 30-Aug-2015 229.9800
07-Sep-2014 241.1800 06-Sep-2015 229.5900
14-Sep-2014 239.9600 13-Sep-2015 229.8000
21-Sep-2014 245.6800 20-Sep-2015 228.7500
28-Sep-2014 239.5000 27-Sep-2015 229.0300
05-Oct-2014 231.6200 04-Oct-2015 230.2900
12-Oct-2014 223.6200 11-Oct-2015 230.3100
19-Oct-2014 226.3200 18-Oct-2015 231.3800
26-Oct-2014 223.4700 25-Oct-2015 230.5000
02-Nov-2014 220.7000 01-Nov-2015 230.8100
09-Nov-2014 226.2500 08-Nov-2015 230.6500
16-Nov-2014 226.2100 15-Nov-2015 230.0200
23-Nov-2014 236.9900 22-Nov-2015 231.0000
30-Nov-2014 237.9000 29-Nov-2015 231.6200
07-Dec-2014 242.7000 06-Dec-2015 232.1100
14-Dec-2014 230.2000 13-Dec-2015 231.8700
21-Dec-2014 237.0000 20-Dec-2015 230.7600
28-Dec-2014 241.2600 27-Dec-2015 231.1900

145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC
IMC Group (International Metalworking Companies): IMC (group of 15
companies, the largest of which was Iscar) was a metalworking tools producer,
manufacturing parts for the aerospace, automotive and mold industries. IMC also
provided engineering and manufacturing solutions to major industries.
Berkshire Hathaway Energy: Berkshire Hathaway Energy generated, stored,
transmitted and distributed energy, including coal, natural gas, hydroelectric,
wind, solar, geothermal and nuclear energy. Berkshire Hathaway energy included
PacifiCorp, Mid-American Energy, and Northern Natural Gas.
Marmon Engineered Components Company: Marmon was a manufacturer of
electrical and electronic wire and cable for industrial and military applications.
The firm also provided solutions concerning continuous performance, control,
instrumentation and data grade cables.
ENDNOTES
Schroeder, A., (2008). The Snowball—Warren Buffett and the Business of Life. New
1
York: Bantom Dell (Random House).
REFERENCES
Heath, T. (2017). Warren Buffett’s $100 Billion Problem: Finding Something Big
to Buy. Washington Post, September 10, G3.
IBISWorld Industry Reports (2016). Engine and Turbine Manufacturing in the US
and Commercial and Military Aircraft and Aerospace, September 3, 2016.
Mattioli, D. and A. Das (2015). Berkshire Hathaway Nears Deal to Buy
Precision Castparts. Wall Street Journal, August 9, downloaded from https://
www.wsj.com/articles/berkshire-hathaway-nears-deal-to-buy-precision-
castparts-1439050499.
Winter 2019 347

145.5.180.38 on Sun, 01 Jan 2023 17:29:48 UTC
APPENDIX A
Warren Buffett’s Letter to Shareholders, 2014
Some Thoughts About Investing
Investment is most intelligent when it is most businesslike.

— The Intelligent Investor by Benjamin Graham
It is fitting to have a Ben Graham quote open this discussion because I owe so
much of what I know about investing to him. I will talk more about Ben a bit later,
and I will even sooner talk about common stocks. But let me first tell you about
two small non-stock investments that I made long ago. Though neither changed
my net worth by much, they are instructive.
This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an
explosion in farm prices, caused by a widespread belief that runaway inflation was
coming and fueled by the lending policies of small rural banks. Then the bubble
burst, bringing price declines of 50% or more that devastated both leveraged
farmers and their lenders. Five times as many Iowa and Nebraska banks failed in
that bubble’s aftermath than in our recent Great Recession.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from
the FDIC. It cost me $280,000, considerably less than what a failed bank had lent
against the farm a few years earlier. I knew nothing about operating a farm. But I
have a son who loves farming and I learned from him both how many bushels of
corn and soybeans the farm would produce and what the operating expenses would
be. From these estimates, I calculated the normalized return from the farm to then
be about 10%. I also thought it was likely that productivity would improve over
time and that crop prices would move higher as well. Both expectations proved
out.
I needed no unusual knowledge or intelligence to conclude that the investment
had no downside and potentially had substantial upside. There would, of course,
be the occasional bad crop and prices would sometimes disappoint. But so what?
There would be some unusually good years as well, and I would never be under any
pressure to sell the property. Now, 28 years later, the farm has tripled its earnings
and is worth five times or more what I paid. I still know nothing about farming and
recently made just my second visit to the farm.
In 1993, I made another small investment. Larry Silverstein, Salomon’s
landlord when I was the company’s CEO, told me about a New York retail
property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a
bubble had popped—this one involving commercial real estate—and the RTC had
been created to dispose of the assets of failed savings institutions whose optimistic
lending practices had fueled the folly.

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Here, too, the analysis was simple. As had been the case with the farm, the
unleveraged current yield from the property was about 10%. But the property had
been undermanaged by the RTC, and its income would increase when several
vacant stores were leased. Even more important, the largest tenant—who occupied
around 20% of the project’s space—was paying rent of about $5 per foot, whereas
other tenants averaged $70. The expiration of this bargain lease in nine years was
certain to provide a major boost to earnings. The property’s location was also
superb: NYU wasn’t going anywhere.
I joined a small group, including Larry and my friend Fred Rose, that purchased
the parcel. Fred was an experienced, high-grade real estate investor who, with his
family, would manage the property. And manage it they did. As old leases expired,
earnings tripled. Annual distributions now exceed 35% of our original equity
investment. Moreover, our original mortgage was refinanced in 1996 and again in
1999, moves that allowed several special distributions totaling more than 150% of
what we had invested. I’ve yet to view the property.
Income from both the farm and the NYU real estate will probably increase in
the decades to come. Though the gains won’t be dramatic, the two investments
will be solid and satisfactory holdings for my lifetime and, subsequently, for my
children and grandchildren.
I tell these tales to illustrate certain fundamentals of investing:
• You don’t need to be an expert in order to achieve satisfactory investment

returns. But if you aren’t, you must recognize your limitations and follow
a course certain to work reasonably well. Keep things simple and don’t
swing for the fences. When promised quick profits, respond with a quick
“no.”
• Focus on the future productivity of the asset you are considering. If you don’t
feel comfortable making a rough estimate of the asset’s future earnings, just
forget it and move on. No one has the ability to evaluate every investment
possibility. But omniscience isn’t necessary; you only need to understand the
actions you undertake.
• If you instead focus on the prospective price change of a contemplated
purchase, you are speculating. There is nothing improper about that.
I know, however, that I am unable to speculate successfully, and I am
skeptical of those who claim sustained success at doing so. Half of
all coin-flippers will win their first toss; none of those winners has an
expectation of profit if he continues to play the game. And the fact that a
given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties
would produce and cared not at all about their daily valuations. Games
are won by players who focus on the playing field—not by those whose
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eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays
without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of
others is a waste of time. Indeed, it is dangerous because it may blur your
vision of the facts that are truly important. (When I hear TV commentators
glibly opine on what the market will do next, I am reminded of Mickey
Mantle’s scathing comment: “You don’t know how easy this game is until
you get into that broadcasting booth.”)
• My two purchases were made in 1986 and 1993. What the economy,
interest rates, or the stock market might do in the years immediately
following—1987 and 1994—was of no importance to me in making those
investments. I can’t remember what the headlines or pundits were saying
at the time. Whatever the chatter, corn would keep growing in Nebraska
and students would flock to NYU.
There is one major difference between my two small investments and an

investment in stocks. Stocks provide you minute-to-minute valuations for your
holdings whereas I have yet to see a quotation for either my farm or the New York
real estate.
It should be an enormous advantage for investors in stocks to have those wildly
fluctuating valuations placed on their holdings—and for some investors, it is. After
all, if a moody fellow with a farm bordering my property yelled out a price every day
to me at which he would either buy my farm or sell me his—and those prices varied
widely over short periods of time depending on his mental state—how in the world
could I be other than benefited by his erratic behavior? If his daily shout-out was
ridiculously low, and I had some spare cash, I would buy his farm. If the number he
yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and often irrational
behavior of their fellow owners cause them to behave irrationally as well. Because
there is so much chatter about markets, the economy, interest rates, price behavior
of stocks, etc., some investors believe it is important to listen to pundits—and,
worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or
apartment house too often become frenetic when they are exposed to a stream of
stock quotations and accompanying commentators delivering an implied message
of “Don’t just sit there, do something.” For these investors, liquidity is transformed
from the unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor
any more than an erratic and mouthy neighbor can hurt my farm investment.
Indeed, tumbling markets can be helpful to the true investor if he has cash available
when prices get far out of line with values. A climate of fear is your friend when
investing; a euphoric world is your enemy.

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During the extraordinary financial panic that occurred late in 2008, I never
gave a thought to selling my farm or New York real estate, even though a severe
recession was clearly brewing. And, if I had owned 100% of a solid business with
good long-term prospects, it would have been foolish for me to even consider
dumping it. So why would I have sold my stocks that were small participations
in wonderful businesses? True, any one of them might eventually disappoint, but
as a group they were certain to do well. Could anyone really believe the earth
was going to swallow up the incredible productive assets and unlimited human
ingenuity existing in America?
When Charlie and I buy stocks—which we think of as small portions of
businesses—our analysis is very similar to that which we use in buying entire
businesses. We first have to decide whether we can sensibly estimate an earnings
range for five years out, or more. If the answer is yes, we will buy the stock (or
business) if it sells at a reasonable price in relation to the bottom boundary of our
estimate. If, however, we lack the ability to estimate future earnings—which is
usually the case—we simply move on to other prospects. In the 54 years we have
worked together, we have never foregone an attractive purchase because of the
macro or political environment, or the views of other people. In fact, these subjects
never come up when we make decisions.
It’s vital, however, that we recognize the perimeter of our “circle of competence”
and stay well inside of it. Even then, we will make some mistakes, both with stocks
and businesses. But they will not be the disasters that occur, for example, when a
long-rising market induces purchases that are based on anticipated price behavior
and a desire to be where the action is.
Most investors, of course, have not made the study of business prospects a
priority in their lives. If wise, they will conclude that they do not know enough
about specific businesses to predict their future earning power.
I have good news for these non-professionals: The typical investor doesn’t
need this skill. In aggregate, American business has done wonderfully over time
and will continue to do so (though, most assuredly, in unpredictable fits and starts).
In the 20th century, the Dow Jones Industrials index advanced from 66 to 11,497,
paying a rising stream of dividends to boot. The 21st century will witness further
gains, almost certain to be substantial. The goal of the non-professional should not
be to pick winners—neither he nor his “helpers” can do that—but should rather
be to own a cross-section of businesses that in aggregate are bound to do well. A
low-cost S&P 500 index fund will achieve this goal.
That’s the “what” of investing for the non-professional. The “when” is also
important. The main danger is that the timid or beginning investor will enter the
market at a time of extreme exuberance and then become disillusioned when paper
losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like
sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an
investor to accumulate shares over a long period and never to sell when the news is
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bad and stocks are well off their highs. Following those rules, the “know-nothing”
investor who both diversifies and keeps his costs minimal is virtually certain to get
satisfactory results. Indeed, the unsophisticated investor who is realistic about his
shortcomings is likely to obtain better long- term results than the knowledgeable
professional who is blind to even a single weakness.
If “investors” frenetically bought and sold farmland to each other, neither the
yields nor prices of their crops would be increased. The only consequence of such
behavior would be decreases in the overall earnings realized by the farm-owning
population because of the substantial costs it would incur as it sought advice and
switched properties.
Nevertheless, both individuals and institutions will constantly be urged to
be active by those who profit from giving advice or effecting transactions. The
resulting frictional costs can be huge and, for investors in aggregate, devoid of
benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you
would in a farm.
My money, I should add, is where my mouth is: What I advise here is essentially
identical to certain instructions I’ve laid out in my will. One bequest provides that
cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for
individual bequests, because all of my Berkshire shares will be fully distributed to
certain philanthropic organizations over the ten years following the closing of my
estate.) My advice to the trustee could not be more simple: Put 10% of the cash in
short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I
suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be
superior to those attained by most investors—whether pension funds, institutions
or individuals—who employ high-fee managers.
And now back to Ben Graham. I learned most of the thoughts in this investment
discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My
financial life changed with that purchase.
Before reading Ben’s book, I had wandered around the investing landscape,
devouring everything written on the subject. Much of what I read fascinated me: I
tried my hand at charting and at using market indicia to predict stock movements.
I sat in brokerage offices watching the tape roll by, and I listened to commentators.
All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.
In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand
prose (without Greek letters or complicated formulas). For me, the key points were
laid out in what later editions labeled Chapters 8 and 20. (The original 1949 edition
numbered its chapters differently.) These points guide my investing decisions
today.
A couple of interesting sidelights about the book: Later editions included a
postscript describing an unnamed investment that was a bonanza for Ben. Ben made
the purchase in 1948 when he was writing the first edition and—brace yourself—
the mystery company was GEICO. If Ben had not recognized the special qualities

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of GEICO when it was still in its infancy, my future and Berkshire’s would have
been far different.
The 1949 edition of the book also recommended a railroad stock that was then
selling for $17 and earning about $10 per share. (One of the reasons I admired Ben
was that he had the guts to use current examples, leaving himself open to sneers
if he stumbled.) In part, that low valuation resulted from an accounting rule of the
time that required the railroad to exclude from its reported earnings the substantial
retained earnings of affiliates.
The recommended stock was Northern Pacific, and its most important affiliate
was Chicago, Burlington and Quincy. These railroads are now important parts of
BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire.
When I read the book, Northern Pacific had a market value of about $40 million.
Now its successor (having added a great many properties, to be sure) earns that
amount every four days.
I can’t remember what I paid for that first copy of The Intelligent Investor.
Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you
pay, value is what you get. Of all the investments I ever made, buying Ben’s book
was the best (except for my purchase of two marriage licenses).
Winter 2019 353

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Financial Education Association

Berkshire Hathaway’s Acquisition of Precision Castparts

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Investment titan Warren Buffett had added Precision Castparts (PCC) to

Berkshire Hathaway’s Acquisition of Precision Castparts

Daniel Anderson thought he was in a good financial position. He graduated

322 Journal of Financial Education

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Headquartered in Portland, Oregon, Precision Castparts was an international

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Precision Castparts operated in two major industries: Aerospace and Power

The aerospace industry included production and services for commercial

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In the power generation industry, power is sold to regulated utilities and

BERKSHIRE HATHAWAY AND WARREN BUFFETT

Berkshire Hathaway was founded in 1839, as a textile manufacturing

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326 Journal of Financial Education

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THE PCC ACQUISITION

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PCC BOARD’S CONSIDERATIONS

• A slowdown in China or other key markets

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PRECISION CASTPARTS CORP

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Revenue by segment 2011 2012 2013 2014 2015

Table 3. Berkshire Hathaway Financial Statements.

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Insurance and Other [Member]

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Railroad, Utilities and Energy [Member]

Finance and Financial Products

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