This case is about Warren Buffet , CEO of Berkshire Hathaway would acquire an electric utility company PacificCorp for 5.1 billion in cash and 4.3 billion in liabilities.
Berkshire Hathaway was originally a textile group but in 2004 it became a holinf company owing subsidiaries engaged in a number of diverse business activities, including: Insurance, apparel, building products, finance and financial products, flight services, retail grocery distribution, carpet and floor coverings.
MidAmerican Energy Holdings Company is a subsidiary of Berkshire Hathaway. It was a leader in the production of energy from diversified sources. It also owns second largest full service independent real estate brokerage in US.
PacificCorp was a leading, low cost energy producer and distributor that served 1.6 million customers.
Buffet’s philosophy of investing: a. Based on Economic reality, not accounting reality. Accounting reality is conservative and is governed by GAAP. Economic reality includes intangible assets such as patents, trademarks, reputation are very valuable. b. The cost of the lost opportunity. The comparison of an investment of other returns available in the market is an important benchmark of performance. c. Time is money.
Calculated the discounted cash flow to decide whether to invest or not. d. Measure performance by gain in intrinsic value, not accounting profit. Measure the economic significance by per share progress not by its size. e. Risk and discount rates. Buffet focused on companies with predictable and stable earnings. f. Diversification. Not to much diversification.
g. Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or “hunch”.
The similarity between MidAmerican and PacificCorp is that they are both energy companies and the merger of these two companies will lead to easy management of MidAmerican because it has experience in its own firm. Furthermore, since PacificCorp has large amount of customers (1.6 million) and it focused on low cost energy. Buying PacificCorp will help MidAmerican to attract low cost energy consuming customers and more loyal clients.