Essay on Examining Berkshire Hathaways Purchase of Geico

5104 Words May 9th, 2011 21 Pages
Berkshire Hathaway and GEICO Insurance

© 2001 Tim Glowa

White Paper: Examining Berkshire Hathaway’s 1995 Purchase of GEICO Insurance

Tim Glowa Tim@Glowa.ca

September 12, 2001 © 2001 Tim Glowa

September 12, 2001

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Berkshire Hathaway and GEICO Insurance Table of contents

© 2001 Tim Glowa

Executive Summary.................................................................................................... 3 Introduction................................................................................................................. 4 Review of the case: Berkshire Hathaway purchasing GEICO.................................... 4 Strategic
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September 12, 2001

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Berkshire Hathaway and GEICO Insurance

© 2001 Tim Glowa

Executive Summary
In 1995, Berkshire Hathaway purchased GEICO insurance for a 25% premium over its traded share price. Many investors, including major brokerage houses and financial reporters, questioned the wisdom of such an investment, especially since Berkshire Hathaway with its near mythical chairman, Warren Buffett, was involved. After reviewing the history of GEICO, Berkshire Hathaway, and the investing philosophy of Warren Buffett, this paper reviews and evaluates the purchase of GEICO. This paper examines two primary tools available for analyzing possible investments. The first is the dividend growth model, which examines how a stock can be valued through examining the dividend cash flow. The second examines the time value of money, through the assumption that future dividends will flow directly to Berkshire Hathaway. Additionally, the paper evaluates the profitability of the purchase of GEICO after a five year period, assuming that all profits flowed to Berkshire. This five year window was selected since financial data on GEICO is reported through the Berkshire Hathaway annual report for the period 1995 to 2000. Finally, a discussion of the limitations and assumptions associated with the time value of money analyses is explored.

September 12, 2001

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Berkshire Hathaway and GEICO Insurance

© 2001 Tim

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