Warren Buffet Example

Founded in 1889, Berkshire Cotton Manufacturing grew to become one of New England’s biggest textile producers.

In 1955, it merged with Hathaway Manufacturing and began to decline due to advancements in technology and foreign competition. Warren Buffet (picture left) and some partners acquired control of Berkshire Hathaway in 1965 believing that the company could be turned around. Warren Buffet announces the acquisition of Pacificorp.

Pays 9.4 billion for the company in cash, liabilities and preferred stock.

BH’s Class A shares jump +2.4%.BH’s gain in market value = $2.55 billion.

Scottish Power’s share price increase 6.28%.

S & P 500 Composite Index close +0.02%Market reacted positively to the acquisition. This is shown by the increase in share price by 2.4% and gain in market value of $2.55 billion for Berkshire Hathaway’s Class A stock. Scottish Power’s share price also jumped 6.28% on the news; the S & P 500 Composite Index closed up 0.02%. This shows consumers’ confidence in the company in the long-term. The $2.55 billion gain in Berkshire’s market value of equity imply that the stock was undervalued and went up to its intrinsic value. Intrinsic value = $6.01

We estimated between $4-$9 billion for the intrinsic value using enterprise value multiples Rate of Return = 9.3%S&P (M) = 10.5%Treasury Yield 30 year (rf) = 5.76%Beta = .75P/E Ratio = 2.55/0.81 = 3.16S&P P/E Ratio = 6.28/17.48 = 0.36With the guidance of Buffet, Berkshire Hathaway would become a financialempire. After acquiring different facets of business, Berkshire Hathaway has been able to consistently increase the company’s overall value. Currently, Berkshire is performing well.

Berkshire completely dominated the market. Annual Berkshire was 24%, while the annual average total return of all stocks was 10.5%. We can see that with these percentages, Berkshire more than double its return (2.29%).