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Warren buffett case study

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Huan Leang

on 6 October 2015

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Transcript of Warren buffett case study

WORLD
MALAYSIA
CASE STUDY 3
FCFE VALUTAION METHOD
WARREN BUFFETT AND BERKSHIRE HATHAWAY

ON THE ANNOUNCEMENT DAY
Thank you
QUESTION 1
Real GDP Growth
(Source: Global Economic Prospects, 2015)

Forecast:
It will maintain approximately 5 % in the next few years
Inflation Rate
(Source: CIA,2015)

in Malaysia :

In 2013
Inflation rate in Malaysia is 2.1%

In 2014
Inflation rate in Malaysia is 3.1%


Income and Expenditure
(Source: Euromonitor,2015)

In the period 2013-2030,
total consumer expenditure will grow at an average annual rate of 4.7%
total disposable income will grow at an average annual rate of 5% in real terms.
Approximately 30% of goods are price-controlled (STABLE)
Discuss what can be inferred from the changes in stock price for Berkshire Hathaway Ltd. and Scottish Power plc. on the announcement day of the acquisition?
Berkshire Hathaway and Scottish Power enjoyed significant gains from the effect of the acquisition, which accounted for
6.28%
and
2.4%
respectively.
Valuation
Multiples methods
The possible meaning of the change of the stock is that the facts that are created in the deal had
a positive effect
on both the buyers ( BRK) and the sellers which are the mother company of Pacific( Scottish power)
THE NOTION BEHIND THE INCREMENT
combination aftermath of financial market behaviors, company’s prospects confidence, and acquisition effects.
Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
Acquired firm’s stock price usually increases; resulting from the premium offered by the acquiring firm

Acquiring firm usually decreases as the concern of overpaid.

(Reilly and Brown 2009)
CONT...
It indicated that most
investors and markets recognized the bid of PacifiCorp was fair
and believed that acquiring PacifiCorp was a
good investment
that could benefit BH.
An acquisition program is desirable and profitable for active acquirers and successive acquisition attempts usually associated with positive announcement effects.

Malatesta and Thompson (1985, p.249)
Consistent with the theory that
Share price performance of PacifiCorp proved the
existence of its intrinsic value
and Buffett made a right decision in recognizing the fact.
Taking advantage of
synergies effects
to enhance future growth prospects and profitability. (Diversified in energy sector)
Historical superior performance
(Psycological factor)
BH had
outperformed the S&P 500
index since 1985
In addition
Is Pacificorp an Ethical Company?

There are grey areas here

1. The Dams Environmental Costs
2. Local Industry Depletion
Cost of equity = 9.32%
Growth rate = 7.45% or 3.00%
Value of equity = 439.3 millions / ( 0.0932-0.0745)
1. The Dams Environmental Costs

The infrastructure causes massive disruptions to the natural flora and fauna

2. In some areas, local salmon industries were destroyed because of these dams
On the Contrary

Hydroelectricity is clean energy

This issue is not all black and white however I personally believe that Pacificorp and the takeover is an ethical company
Full transcript