Warren Buffet
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It is important to realize that Berkshires share price is extremely large, in the range of about $85,000 in May of 2000. Normally, the company making the acquisition’s stock price will fall following the announcement due to cash leaving the business. However, in Berkshire’s case they were sitting on over 40 billion dollars, and the transaction with a purchase price of PacifiCorp of 5.1 million dollars in cash and 4.3 billion dollars in liabilities barely makes a dent in their financial structure. That being said, with the announcement I don’t feel that the stock price jumping 1.8% is a direct reflection on the plans of acquisition but rather from Berkshire’s numerous other holdings. Perhaps some of the gain in stock price can be attributed to Berkshire’s plan to enter into yet another industry. Berkshire is just a unique holding company and its’ result I do not feel follow the same patters as normal companies in the same situation. Scottish Power on the other hand did react the same as any company being acquired. If they were to consider selling the company at all, it must not be profitable to them. This does not mean that PacifiCorp is not a profitable company, but simply that Scottish Power may not have the capital to effectively manage PacificCorp’s needs. The fact that Berkshire made this bid for the company instantly increased it’s values to it’s shareholders.
PacifiCorp does seem to follow the industry in its’ financial figures. However, they have almost two times the amount of outstanding shares as other companies in the same industry. This means that following some of the ratios of other companies, and incorporation the bigger number of shares, they would probably be receiving a stock price somewhere in the range of $12.47 to $15.37, depending on how the market was performing. Their beta would most likely be in the same range of .70 to .85, the same range as other companies in the industry.
The future value, or intrinsic value of the stock seems to imply that this would be a good investment for Berkshire. There are many reasons for this and one is that PacifiCorp looks to be a good company but Scottish Power may not have enough capital investment to run it correctly. Berkshire has this capital. With this acquisition, Berkshire would gain low cost power output and probably double their utility accounts. Combining PacifiCorp and MidAmerican Energy would increase revenues and market share, thus providing a good investment decision for Berkshire. Plus, Berkshire has a tremendous amount of cash just sitting there that could be earning much better interest invested in another project. I also think it is smart for Berkshire to expand into an industry that will continue to grow in the upcoming years.
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