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    Warren E. Buffet, 2005

    Uploaded by

    Motiram Paudel Bimal
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    Copyright:

    © All Rights Reserved
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    Warren E. Buffett, 2005 (On May 24,2005, Warren E. Buffet, the chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, ' subsidiary of Berkshire Hathaway, would acquire the electric wility PaciiCorp. In Buffets largest deal since 1998, and the second largest of his entire career, MidAmer- ‘can would purchase PacitCorp from its parent, Scotish Power ple, fer $5.1 billion in ‘ash and $43 billion in Habilities and preferred stock. “The energy sector has long interewted us, and this isthe right ft,” Buffet said, AC the announcement, Berkshire Hathaway's Class A shares closed up 2.4 pervent for the day, fora gain in market value of $2.17 billon.' Scottish Power's share price also jumped 6,28 perceat en the news”; the S&P 500 Composite Index closed up (0002 percent. Exhibit I illusates the recent share-prie performance for Berkshire Hathaway, Scottish Power, and the S&P £00 Indes The acquisition of PacifiCorp renewed public interest in its sponsor, Warren Buffet. In many ways, he was an anomaly. One ofthe richest individuals inthe world (with an estimated net worth of about $44 billion), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a ‘compound annual increase in wealth for Berkshire Hethaway of 24 percent from 1965 to 2004),” Berkshire paid him only $100,000 per year to serve as its CEO. While Buffet and cther insiders controlled 41.8 percent of Berkshire Hathaway, he ran the ‘company in the interests of all shareholders, “We will not take cash compensation, resiricted stock, ot option grants that would make cur results superior (0 these of Berkshire's investors," Buffet said, “I will keep well over 99 percent of my net wor in Berishire. My wife and I have never sold a share nor do we intend ta." "The pershare ctang in Bershie Hathavay’s Cs A share price athe dt of the announcement was ‘2,010. The compar ha 1.27, 197 Gass stares euanding “persue etange in Scotish oer shar ece athe date ofthe sanouncerent ws (Bits oan) [GRPI7, The company ha 12000 shes ean "in comparison. the annul serge tot] rtar ol lrg oc fem 1680 tee of 2008 ws 1018 perent, Siok, Sond, ls and infin 248 Yerba (Chicaga iktson Acces 208), 217 ‘Waren Bute, Amma Ltr Sharshoier, 20 ‘Thiccae ws prepare by Rober Breer ad Sean B, Ca a a rls ces ee th 6 state efestveor eee hanlng ofan amnisetiewitation. Copyright © 208 by te Unive ‘of ViginiaDirdes Schoo Founaion, Charlatesvile, YA. ll gh reserve. Toone copes sead ove. ato sates dadenpbtshing cm. No part of hs publication maybe reproduced. red na real ‘som, med a prdsbet, + ansntedbnany for or bys meany-deconl mechani Pht ‘opying, recording, or therwie—witout he permission of he Danton Scheel Fondation | Buffet was the subject of numerous laudatory articles and at least eight biogra- hie yet he remained an intensely private individval, Though acclaimed by many as ‘an intellsctual genius, he shunned the company of intellectuals ans preferred to aflect the manner of a down-home Nebraskan (he lived in Omahs) and a tough-minded investor. In contrast to investng’s other “star.” Buffett acknowledged his investment failures both quickly ané publicly. Although he held an MBA from Columbia Uni versity and credited his mentor, Professor Benjarnin Graham, with developing the phi losophy of value-based investing that had guided Buffett to his success, he chided business schools forthe irelevance of their finance and invexing theories. Numerous writers sought to distill the essence of BulTet”s success. What were the hey principles that guided Buffett? Could those principles be applied broadly in the 21st century, of were they nique to Buffett and his time? From an understand: ing of those principles. analysts hoped to illuminate the accuisition af PacifCorp, ‘What were Buffet’s protable motives in the acquisition? What did Buffet’ offer say about his valuation of PacifiCorp, and how would it compare with valuations for other regulated utilities? Would Berkshire’s acquisition of PacifiCorp prove to be a success? How would Buffet detine success? Berkshire Hathaway Inc. Berkshire Hathaway was incorporated in 1880 as Rerishire Cotton Manufacturing, and eventually grew to become one of New England's bigges! textile producers, ‘accounting for 25 percent of the United Staes’ cotton textile production. In 1955, Berkshire merged with Hathaway Manufacturing and began a secular decline due to {nrlation, technological change, and intensifying competion from foreign competitors. In 1965, Bulew and some partners acquired control of Berkshire Hathaway, believing that its Financial decline could be reversed Berkshire Hathaway "Class A’ va. S4P 500 Compose index 100 310 SLOOIE SEL OEPEEELOEL ELE LE OIE LE Case 1 Waren E, Buti, 2008 Over the next 20 years, it became apparent that large capital investments would be required 10 remain competitive and that even then the financial retums would be ‘mediocre. Fortunately, the textile group generated enough cash in the intial years 10 Permit the firm to parchase two insurance companies headquartered in Omaha: ‘National indemrity Company and National Fire & Marine Insurance Company. Acqui- sitions of otter businesses followed in the 1970s and 1980s; Berkshire Hathaway exited the textile business in 1983, ‘The investment pesfommance ofa share in Berkshire Hathaway had astonished most observers. In 1977, the firms yearend closing shire price was $102; on May 24, 2005, the closing price on its Class A shares reached $85,500, Over the same period, the Standard & Poor's S00 Index grew from 96 to 1,194, Some observers called for Buf- fett to split® the firm's share price to make it more accessible o the individual investor. He steadfastly refused ® In 2004, Berkshire Hathaway's annual report described the firm as “a holding company owning subsidiaries engeged in a number of diverse business activities” Berkshire's portolio of businesses included: + Insurance: The largest component of Berkshire’s portfolio focused on propesty and casualty insurance, on both a direct and a reinsurance basis (for example, GEICO, General Re. ‘+ Apparel: Manufacturing and distribution of a variety of footwear and clothing products, including underwear, active-wear, children’s clothes, and uniforms (for ‘example, Frat ofthe Loom, Garan, Fechheimer Brothers, H.H. Brown Shoe, Justin Brands), ‘+ Building products: Manafacturing and distribution ofa variety of building ‘materials, and related products and services (for example, Aeme Building Brands, Benjamin Moore. Johns Manville, MiTek} *+ Finance and financial products: Proprietary investing, manufactured housing ‘and related consumer financing, transportation equipment leasing, furniture leasing, lfe annuitics and risk management products (for example, BH Finance, Clayton Homes, XTRA, CORT, Berkshire Hathaway Life, and General Re Securities), *+ Flight services: Training to operators of sireraft and ships, and providing frac tional ownership programs for general aviation sireraft (for example, FightSafety, Neves) “Ast was an increase in the number of fm’ ousanding shares ta id mot cause a change inthe “staretoies'equty A to-fr-oee split woul ena SO percent eduction in the stock's price athe ime ‘ef thesplt. Company dietor auorid tock apis to mk he company's hae fora oar ance of ivesore “in 1996, Berkshire Hathaway issued Clas B shares, which hal ax economic interstage 1310anda ‘vein interes: gua © 1/200 at of th fins Class A shies erkshite Hahaway Inc, 2008 Annual Repo, 1. ‘art One Seine Some Themes + Retail: Retail sales of home furnishings, appliances, electronics, fine jewelry and sifls (for exampie, Nebraska Fumiture Mart, R.C. Willey Home Fumishings, Star Furniture Company, Jordan's Furniture, Borsheim's, Helzberg Diarnond Shors, Ben Bridge Jeweler), * Grocery distribution: Wholesale distributing of groceries and nonfood items (forexample, MeLane Company). * Carpet and floor coverings: Manufacturing and distribution of earpet and floor coverings under a varity of brand names (for example, Shaw Industries), Berkshire also owned an assortment of smaller businesses" generating about $3 billion in revemies. Exhibit 2 gives « summary of revenues, operating profits capital expenditures, depreciation, and assets for Berkshire’s various business segments, The company’s investment portfolio also included equity interests in numerous publicly traded companies. which sre summarized in Exhibit 3. In addition, the company ‘owned about $21.4 billion of foreign exchange contracis at yearend, spread atvong 12 currencies. Prior to March 2002. neither Buffett nor Berkshire had ever traded In currencies, but Buffett had developed serious conceras about the United States” lang ‘current account deficits, and he hoped that his currency bets would offset the grow. ing pressure on the dolla. Buffett's Investment Philosophy Warren Buffett was first exposed to formal training in investing at Columbia Univer. sity where he studied under Professor Benjamin Graham, A coauthor of the classic tex Security Analysis, Graham developed a method of identifying undervalued stocks (that is to say, stocks whose prices were less than their intrinsic value), This became ‘he comerstone of modem yalue investing. Graham's approach was to focus on the ‘value of asset such as cash, net working capital, and physical assets, Eventually, Bufett modified that approach to focus also on valuable franchises that were unrecognized by the market, Orer the years. Buffet had expounded his philosophy of investing in his chair- ervon’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 tonc, The letters emphasized the following element 1. Economic reality, not accounting reality. Financial statements peepared by accountants conformed to rules that might not adequately represent the economic reality of a business. Buffett wrote “These included Scon Fever. a verified manuficver nd dts of commercial and ndastial pr ‘ts; Buffalo News, a newspaper publisher in wegern New York; ltematina Day Doce, which reve ‘std serviced sytem of 6.00) Dir Queen sores: Se's Candies, a manufacture an itbetorof toned

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