Warren Buffet

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Case Overview
Warren Buffet Berkshire Hathaway MidAmerican

Acquire

PacifiCorp BUFFETS INVESTMENT PHILOSOPHIES

Increasing Stock Price

POSITIVE RESPOND FROM THE MARKET
Buffets Excellent Record
Outstanding Performance of Berkshire > 24% compound stock price annual growth

Berkshire Experiences on equity investment > BIG FOUR ONE OF THE RICHEST PEOPLE IN THE WORLD ACCORDING TO FORBES

Berkshires investment in MidAmerican

Companys valuation implied by the multiples for comparable firms.

Enterprise Value
(in million dollars)

MV Equity
(in million dollars)

Alliant Energy Corp. Cinergy Corp. NSTAR SCANA Corp. Wisconsin Energy Corp. PacifiCorp Median Mean

$ 5,600 $ 13,231 $ 5,287 $ 7,967 $ 7,691 $ $ $ $ 6,252 9,289 7,691 7,955

Alliant Energy Corp. Cinergy Corp. NSTAR SCANA Corp. Wisconsin Energy Corp. PacifiCorp Median Mean

$ 3,333 $ 7,989 $ 2,898 $ 4,486 $ 4,048

$ $ $ $

4,277 5,904 4,048 4,551

Source: Value Line Investment Survey

The Bid Price for PacifiCorp is not appropriate

$10,000 $9,000 $8,000 $7,000
$6,252 $7,691 $7,955 $9,289 $9,400

$6,000
$5,000 $4,000 $3,000 $2,000 $1,000 $PacifiCorp Value Comparable Firms

Median

Mean

Bakshire's offer

Source: Value Line Investment Survey

The Bid Price is appropriate, NPV = $. 9257

Projected FCF PacifiCorp
18000 16000 14000 12000 10000 8000 6000 4000 2000 0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

FCF

PV, i=8.08%

Initial Investment

NPV

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

The results set the value of PacifiCorp between $6,200M and $9,289M
PacifiCorp Valuation ($M USD, 2005)
$20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $Minimum value valuation mult Maximum value valuation mult Bid Price PV

$18,657

$9,289 $6,252

$9,400

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

Buffetts Investment Philosophy

Economic Reality, not accounting reality The cost of lost opportunity Value Creation: Time is money Measure performance by gain in intrinsic value, not accounting profit Risk & Discount Rates Conventional Diversification

Investing behavior should be driven by information, analysis & selfdiscipline; not by emotion or hunch.
Alignment of agents & owners

Buffetts Investment Philosophy

1. Economic Reality, not accounting reality Financial statements prepared by accountants conformed to rules that might not adequately represent the economic reality of a business. Buffett also defined economic reality at the level of business itself. 2. The cost of lost opportunity Buffet always compares his choice with another best opportunity. Buffet considering the cost of loosing the other opportunity. This includes not only the money spent in buying that asset but also the economic benefits that one has to do without.

Buffetts Investment Philosophy

3. Value Creation: Time is money Buffett defined intrinsic value as the discounted value of the cash that can be obtained from a business during its remaining life. We should really pay attention to the business future potential growth, not the amount of investment that we put. 4. Measure performance by gain in intrinsic value, not accounting profit Buffett does not measure the economic significance or performance of Berkshire by its size, but by per-share progress.

Buffetts Investment Philosophy

5. Risk & Discount Rates Conventional His company used almost no debt financing, the idea of a risk factor does not make sense to him so that he utilized a risk-free discount rate 6. Diversification Investors should pay attention to only businesses that they understand. Buffet believed that it is not necessary to diversify if the objectives is only for spreading away investment risks.

Buffetts Investment Philosophy

7. Investing behavior should be driven by information, analysis & self-discipline; not by emotion or hunch. It would be wiser for investors to form their own ideas of the value of their holdings, based on full reports from the company about its operation and financial status. 8. Alignment of agents & owners He is a better businessman because he is an investor. And he is a better investor because he is a businessman

Bekshire should acquire PacifiCorp, a bid price of $9,400 is appropriate

Buffet Records:
Berkshires performances have been outstanding Berkshire Hathaways Big Four Berkshires investment in MidAmerican, IRR:71%

DFC method, NPV: $9,272, almost twice bid price. Buffet Investment Philoshophy. The successful of Warren E. Buffett:
a combination of a good calculation, the courage, and patience in investing in the right time