Set in May 2005, this case invites you to assess Berkshire Hathaway's bid, through MidAmerican Energy Holdings Company, its wholly owned subsidiary, for the regulated energy-utility PacifiCorp. The task is to perform a simple valuation of PacifiCorp and to consider the reasonableness of Berkshire's offer. Your analysis can readily extends into the investment philosophy and the remarkable record of Berkshire's chair and CEO, Warren E. Buffett.
Questions for Discussion
1. What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement? Specifically, what does the $2.55 billion gain in Berkshire's market value of equity imply about the intrinsic value of PacifiCorp?
2. Based on the multiples for comparable regulated utilities, what is the range of possible values for PacifiCorp? What questions might you have about this range?
3. Assess the bid for PacifiCorp. How does it compare with the firm's intrinsic value? Consider performing a simple discounted cash-flow (DCF) analysis to make this comparison.
4. How well has Berkshire Hathaway performed? How well has it performed in the aggregate? What about its investment in MidAmerican Energy Holdings?
5. What is your assessment of Berkshire's investments in Buffett's Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo?
6. From Warren Buffett's perspective, what is the intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them?
7. Critically assess Buffett's investment philosophy. Be prepared to identify points where you agree and disagree with him.
8. Should Berkshire Hathaway's shareholders endorse the acquisition of PacifiCorp? Explain. (A simple "yes" or "no" is not sufficient here).