Title: Stock Market and Berkshire Hathaway
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1.0 Introduction
This case focuses on an investor known as Warren Buffet who had witnessed an organisation known as Berkshire Hathaway which he had invested in. For the company, under Berkshire Hathaway leadership, the organisation had witnessed their share price increase in 33 years from $7.60 to approximately $30,000. The organisation was a textile fabricating business where in 1966, it was fully owned by buffet. To evidence the businessman success in the world of business, as at 2008, he was ranked as the global wealthiest individual ahead of Bill Gates worth approximately $62 billion as evidenced by Forbes with yahoo reporting him as being worth $58 billion. Over the years, Buffet had interests in companies such as WESCO, ABC, Salomon Inc., Coca-Cola company, AIG, and General Electric. Based on this background information, this case will evaluate on the organisation business practice, analyse its performance and generate recommendations for its future success in its operations.
2.0 Analysis
2.1 Approval during Acquisition Announcement
As a strategy evidencing Buffet business prowess, after the announcement of the Berkshire Hathaway stock price, there was a significant changes. As evidenced in appendix 1, there was a record of $2.55 billion gain in the Berkshire’s market value of equity. This was a continuation of the business person ability of consolidating the market that he ventured and successfully capitalizing the market for positive results. As evidenced in the case, the changes represented a market approval for the acquisition and value creation for both the buyers and sellers. For instance, for PacifiCorp, it was an appropriate indicator that it had fallen within the range of their competitors as illustrated in appendix 1. Linking Buffet early life, initial investment and personal life, it is evident that his practice is characterised by embrace of behavioral finance theory. According to (ref), this theory evidence that investments are guided by embrace of psychological factors. This is hence a right investment and characterized by success. Further, for the value of equity gain, it can be argued that the $6.95 higher as illustrated in the appendices is an approval of the acquisition. The fact that both trading partners succeeded positively is an indicator of the ability of the businessperson to be successful in their ventures.
2.2 Investment Value of PacifiCorp and Possible Questions
According to Küpper and Pedell (2016), the valuation of an organisation represent a core question and topics in the corporate finance. Similarly, in the case of Buffet, the investment value is identified as being instrumental in valuing the present cash flow value and best practice of the organisation in its market. Through the use of comparable regulated utilities, as illustrated in appendix 2, the range of possible values for PacifiCorp have been identified. Through this, a set of questions regarding this range have been established. In regard to the total value of the company, the market multiple have been multiplied by EBITDA.
Since the PacifiCorp’s EBITDA was 1093.30 with the market multiple being 8.1
The overall value of PacifiCorp was 8.18 multiplied by 1093.30 which amounted to $8,943.19 million
The major question posed was in regard to the revenue. As illustrated in appendix 2, the value of PacifiCorp has been providing impractical results for range of revenue as compared to EBITDA and the Net income. As a best practice, Investopedia (2021) note that for the revenues, they should be greater than EBITDA and EBIT and the Net income.
2.3 Intrinsic Value of the Firm through a Simple Discounted Cash-Flow (DCF) Analysis
Adopting the definition of Investopedia (2021), the DCF analysis finds the present value of expected future cash flows by use of a discount rate. Similarly, for assessing the bid for PacifiCorp, the value for money is presented which evidence their future cash flows are positive for this investment. This is since they are greater than the value of the initial investment as illustrated in appendix 3. In the appendix 3, the calculations had noted that the discount rate was 9.32% with $4.76 being the range of the rest of the comparable firms. These are critical and need to be prioritized as investors continue venturing in various markets and areas.
Berkshire’s Bid for PacifiCorp Assessment
From a general context, it is evident that Berkshire Hathaway has outperformed itself. This is with a consideration of the last 40 years. As illustrated in the case study, the market had been initiated in the year 1965. Further, it has been noted that in 1977, the organisation year end closing share price was standing at $107. As years progressed, in May 24th 2005, the year closing price was ranked in Class A shares reaching a high-level of $85,500. In their operation, Berkshire had achieved an annual increment of their wealth of approximately 24% from year 1965 as illustrated in appendix 4. This is more than double of 10.5% of their average increase for the other significantly enormous stocks. In the case, it is evidenced that there was a time of recession where decline owing to inflation, technologies changes and intensified competition from their international competitors. Nevertheless, they have appropriately recuperated appropriately after closure of their textile side of their business.
Additionally, as illustrated in appendix 4, Berkshire Hathaway has recorded a performance of below S&P 500 Index starting in April 2005 to May 2005. As evidenced in the case, the Scottish Power had outperformed consistently the S&P 500 Index factoring year 2005 months of March to May. This is potentially a significant factor attracting Berkshire to purchasing PacifiCorp.
Finally, as it shall be evidenced in conclusion and recommendation, the operation is an appropriate investment. Considering year 2002, 9.9% of voting interest and 83.7% of economic interest in equity MidAmerican. This facilitate their significant stake in the organisation with minimal violation of utility laws proving to be successful in their operations. As illustrated in the appendices, MidAmerican Holdings netted earnings of 170 million in year 2004 with a comparison of 2003 net earnings of 416 million. MidAmerican gained a net loss from 2003-2004 with an acquisition of PacifiCorp supplying the immensely demanded new, more profitable investments for raising their overall net income in year 2005.
2.4 Berkshire’s Hathaway Performance in Aggregate
In order to evaluate the success of investment in an organisation, core analysis of its operations is essential (Buckley et al., 2018). Taking this into account, Buffet’s strategy is informed by the core analysis of the organisation itself. Part of the analysis entail the simplicity and consistent history of practice, attractive to the market in a long-term basis, management process quality and the organisation ability in creating value. In the case study, the big four companies are identified as including Coca-Cola, American……..
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