Warren Buffet

Syndicate YP47B:Adilla Nurlina

Ayu Eka Putri Dwi Kurnia PutriIndri Yul Avianti

Siti Larissa SarasvatiYara Putri Genevera

Yulianita Rahayu

Case Overview

Berkshire Hathaway

MidAmericanWarren Buffet

PacifiCorp

Acquire

?BUFFET’S INVESTMENT

PHILOSOPHIES

Increasing Stock Price

Buffet’s Excellent Record

POSITIVE RESPOND FROM THE MARKET

Outstanding Performance of Berkshire > 24% compound stock price annual growth

Berkshire Experiences on equity investment > BIG FOUR

ONE OF THE RICHEST PEOPLE IN THE WORLD ACCORDING TO FORBES

Berkshire’s investment in MidAmerican

Company’s valuation implied by the multiples for comparable firms.

Source: Value Line Investment Survey

Enterprise Value (in million dollars)

Alliant Energy Corp. $ 5,600

Cinergy Corp. $ 13,231 NSTAR $ 5,287 SCANA Corp. $ 7,967 Wisconsin Energy Corp. $ 7,691

PacifiCorp $ 6,252 $ 9,289 Median $ 7,691 Mean $ 7,955

MV Equity(in million dollars)

Alliant Energy Corp. $ 3,333

Cinergy Corp. $ 7,989 NSTAR $ 2,898 SCANA Corp. $ 4,486 Wisconsin Energy Corp. $ 4,048

PacifiCorp $ 4,277 $ 5,904 Median $ 4,048 Mean $ 4,551

The Bid Price for PacifiCorp is not appropriate

Source: Value Line Investment Survey

PacifiCorp Value Comparable Firms

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

6252

7691

9289

7955

9400

Median Mean Bakshire's offer

The Bid Price is appropriate, NPV = $. 9257

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

2000

4000

6000

8000

10000

12000

14000

16000

18000

Projected FCF PacifiCorp

FCF PV, i=8.08%Initial Investment NPV

The results set the value of PacifiCorp between $6,200M and $9,289M

Minimum value valuation mult

Maximum value valuation mult

Bid Price PV $-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

$6,252

$9,289 $9,400

$18,657

PacifiCorp Valuation($M USD, 2005)

Source: PacifiCorp Financial Results; BH Economic Projections for PacifiCorp

•Economic Reality, not accounting reality

•The cost of lost opportunity

•Value Creation: Time is money

•Measure performance by gain in intrinsic value, not accounting profit

•Risk & Discount Rates Conventional

•Diversification

•Investing behavior should be driven by information, analysis & self-discipline; not by emotion or ‘hunch’.

•Alignment of agents & owners

Buffett’s Investment Philosophy

1. Economic Reality, not accounting realityFinancial statements prepared by accountants conformed to rules that might not adequately represent the economic reality of a business. Buffett also defined economic reality at the level of business itself.

2. The cost of lost opportunity Buffet always compares his choice with another best opportunity. Buffet considering the cost of loosing the other opportunity. This includes not only the money spent in buying that asset but also the economic benefits that one has to do without.

Buffett’s Investment Philosophy

3. Value Creation: Time is moneyBuffett defined intrinsic value as the discounted value of the cash that can be obtained from a business during its remaining life. We should really pay attention to the business future potential growth, not the amount of investment that we put.

4. Measure performance by gain in intrinsic value, not accounting profit Buffett does not measure the economic significance or performance of Berkshire by its size, but by per-share progress.

Buffett’s Investment Philosophy

5. Risk & Discount Rates Conventional His company used almost no debt financing, the idea of a risk factor does not make sense to him so that he utilized a “risk-free” discount rate

6. DiversificationInvestors should pay attention to only businesses that they understand. Buffet believed that it is not necessary to diversify if the objectives is only for spreading away investment risks.

Buffett’s Investment Philosophy

7. Investing behavior should be driven by information, analysis & self-discipline; not by emotion or ‘hunch’. It would be wiser for investors to form their own ideas of the value of their holdings, based on full reports from the company about its operation and financial status.

8. Alignment of agents & owners He is a better businessman because he is an investor. And he is a better investor because he is a businessman

Buffett’s Investment Philosophy

“Bekshire should acquire PacifiCorp, a bid price of $9,400 is appropriate”

• Buffet Records:– Berkshire’s performances have been outstanding– Berkshire Hathaway’s “Big Four”– Berkshire’s investment in MidAmerican, IRR:71%

• DFC method, NPV: $9,272, almost twice bid price.• Buffet Investment Philoshophy.• The successful of Warren E. Buffett:– a combination of a good calculation, the courage, and

patience in investing in the right time