Question

Does your reaction to the announcement suggest in terms of creating value not only for PacifiCorp’s acquirer, Berkshire Hathaway, but also for the seller, Scottish Power?

Answer 1

Warren Buffett attended Columbia University where he studied under Professor Benja min Graham. Professor Graham developed a method of identifying undervalued stock. Graham focused on the value of assets, networking capital and physical assets.
Buffett took that method further and focused on valuable franchises that were unrecognized by the market. When Berkshire Hathaway and Scottish Power announced the acquisition Hathaway's share prices jumped up 2.4°/o and Scottish Power 's share price jumped 6.28°/o on the day the acquisition was announced. Berkshire's stock increased because this acquisition would strengthen their subsidiary company MidAmerican Energy Holdings company. The Scottish Power's share price increased because Berkshire was able to see the intrinsic value of the company and found value with purchasing PacificCorp from Scottish Power. This showed the market and investors that the intrinsic value ofScottish Power made it an undervalued company. With the large purchase price of their subsidiary PacificCorp, the company's stock price increased.

The range for PacificCorp comparing to the Enterprise values listed in Exhibit 10 are in the range from 4.277 billion up to 9.023 billion for the mean and between 4.308 to 9.289 billion for the median. This is based on the performance of other regulate d energy firms.
PacificCorp would fall somewhere within this range. The one concerning value I see is that the revenue numbers are significantly lower that the EBIT and EBITDA and lower than the Net income numbers. This would cause me to look into how the numbers for these three sections were being calculated. This might be overstated or potentially skewed.

Berkshire Hathaway has performed very well over the last 20 years. They started with a cotton manufacturing company which was experiencing market changes and Berkshire Hathaway saw this challenge and decided to invest in two insurance companies. This allowed Berkshire Hathaway's to branch out their investments into other areas providing them increased growth and revenue opportunities. Berkshire's year end closing share price was $102 in 1977 and on May 24, 2005 the share price reached $85,500. This is a significa nt growth over the years. Their insurance companies lead the growth on revenues and identifiable assets. Their philosophy to reinvest their earnings into the companies allows them to continue to grow stable and consistent perf orming companies.

Berkshire's invested $3.83 billion in the "Big Four" companies in multiple transactions between May 1988 and October 2003. The Big Four companies consist of American Express, Coca-Cola, Gillette, and Wells Fargo. In Exhibit 3 we see that in 2005 American Express had an annual average total return of 17°/o and a market value of $8.546 billion.
Berkshire Hathaway owned 12.1°/o of the company and the cost of investment was l.470B. Berkshire owned 8.3°/o of shares to the Coca Cola company. Coca Cola's market share was 8.328 Billion and had an average rate of return of 16°/o. Berkshire paid 1.299 billion investment. Berkshire owned 9.7°/o of Gillette company. Gillette's market share was 4.299 billion and the average rate of return was 14°/o. Berkshire invested 600 million in the company. The final company is Wells Fargo. Berkshire owns 3.3°/o of the company. Wells Fargo market value is 3.508 billion and has an average rate of return of 13°/o. Berkshire invested 369 million.

Since Berkshire has invested 3.84 billion in the four companies, the combined market share values for the four companies is $24,681billion. That is a significant growth in their investments and all four companies are holding a steady market share and average rate of return. I would say Berkshire made a solid investment that is providing a good return on their investment.