Berkshire Hathaway Pacificorp Case

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Executive Summary:
The purpose of this case study is to analyze the decision to acquire PacifiCorp by MidAmerican Energy Holdings Company. Warren E. Buffett, the CEO of Berkshire Hathaway Inc., is renowned for his investment strategies and has the best investment record in history.
Buffett's investment decisions have led to a compound annual increase in wealth in Berkshire Hathaway of 24% from 1965 to 2004. However, with a growth in size only the larger sized acquisition could help in attaining the long-term goals of Berkshire Hathaway. Thus, after spending several years in a fruitless search for larger acquisition opportunities, finally on May 24, 2005 Buffett announced that Mid-American Energy Holdings Company, a subsidiary of Berkshire
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Warren E. Buffett, the chairperson and the CEO of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. He considers this as his largest deal since 1998 and the second largest in his entire career. The acquisition of PacifiCorp renewed public interest in Berkshire Hathaway’s shares and on the day of the announcement the market value of equity had a $2.55 billion gain.
Buffett’s investments are based on the intrinsic value of a company, he says, “intrinsic value is all important and is the only logical way to evaluate the relative attractiveness of investments and businesses” and he also says maximizing Berkshire’s average annual rate of gain in intrinsic business on a per-share basis is their long-term economic goal which gives the investors the belief that the acquisition will be very beneficial to the company. These beliefs could possibly be the cause for the $2.55-billion gain in Berkshire’s market value of equity, which implies the intrinsic value of PacifiCorp must be very
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This does not seem too bad. However, if we compare it to the other energy firms listed in Exhibit 1 we see that it is on the low end. A decent return on equity is not enough. Berkshire Hathaway’s acquisition criteria from Exhibit 8 require a good return on equity while using little to no debt. The debt-to-equity ratio of the comparable firms on Exhibit 1 range from 1.95 to 3.80. PacifiCorp had a debt-to-equity ratio of 2.52 and 2.71 in 2004 and 2005 respectively. While they are not the highest of the energy firms referenced in the case and are close to the average a debt-to-equity ratio above 1 indicates the company is highly leveraged and may be a reason for creditors and investors to shy away from investing in the

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