Warren E. Buffett, 2005

Abstract

In May 2005, Warren Buffett, the chair and chief executive officer of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. MidAmerican would purchase PacifiCorp from its parent, Scottish Power and renewed public interest in its sponsor, Warren Buffett. By understanding Buffett's principles, analysts hoped to illuminate the acquisition of PacifiCorp. What did Buffett's offer say about his valuation of PacifiCorp, and how would it compare with valuations for other regulated utilities? Would Berkshire's acquisition of PacifiCorp prove to be a success?

Excerpt

UVA-F-1483

Rev. Apr. 30, 2015

Warren E. Buffett, 2005

On May 24, 2005, Warren E. Buffett, chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway, would acquire the electric utility PacifiCorp. In Buffett's largest deal since 1998, and the second-largest of his entire career, MidAmerican would purchase PacifiCorp from its parent company, Scottish Power plc, for $ 5.1 billion in cash and $ 4.3 billion in liabilities and preferred stock. “The energy sector has long interested us, and this is the right fit,” Buffett said. At the announcement, Berkshire Hathaway's Class A shares closed up 2.4% for the day, for a gain in market value of $ 2.55 billion. Scottish Power's share price also jumped 6.28% at the news; the S&P 500 Composite Index closed up 0.02%. Exhibit 1 illustrates the recent share-price performance for Berkshire Hathaway, Scottish Power, and the S&P 500 Index.

The acquisition of PacifiCorp renewed public interest in its sponsor, Warren Buffett. In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $ 44 billion), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth for Berkshire Hathaway of 24% from 1965 to 2004), Berkshire paid him only $ 100,000 per year to serve as its CEO. While Buffett and other insiders controlled 41.8% of Berkshire Hathaway, he ran the company in the interests of all shareholders. “We will not take cash compensation, restricted stock, or option grants that would make our results superior to [those of Berkshire's investors],” Buffett said. “I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to.”

Buffett was the subject of numerous laudatory articles and at least eight biographies, yet he remained an intensely private individual. Although acclaimed by many as an intellectual genius, he shunned the company of intellectuals and preferred to affect the manner of a down-home Nebraskan (he lived in Omaha) and a tough-minded investor. In contrast to the investment world's other “stars,” Buffett acknowledged his investment failures both quickly and publicly. Although he held an MBA from Columbia University and credited his mentor, Professor Benjamin Graham, with developing the philosophy of value-based investing that had guided Buffett to his success, he chided business schools for the irrelevance of their finance and investing theories.

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Keywords: Cash flow, efficient markets, investment analysis, valuation