Warren E. Buffett, 1995
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When Warren Buffet, the CEO of Berkshire Hathaway announced the acquisition of GEICO Corporation observers were astonished since the deal would yield $70.00 per share to its stakeholders, up from the $55.75 per share market share. In addition, they were also astonished because between both firms there was no apparent synergy.
Berkshire Hathaway, Inc incorporated in 1989 as Berkshire Cotton Manufacturing that eventually would account for 25 percent of the country’s cotton textile production. GEICO Corporation was the seven largest auto insurers in the United States. The firm’s senior managers had an investment style to Buffett.
Warren Buffet first studied investment at Columbia University under Professor Benjamin Graham, the coauthor of a classic text, Security Analysis in which he developed a method of identifying undervalued stocks. This method later becomes the cornerstone of the modern approach of valuing investments. Buffet assessed intrinsic value as the present value of the future expected performance, his thinking was not conventional. As far as Buffet was concerned, the stock market did not exist. He believed that we invest in the business itself not in the market.
The acquisition of the 49.6 percent of GEICO Corporation at $70.00 per share above the market price of $55.75 was a challenge to company’s shareholder. The following statement should be addresses prior to actual acquisition:
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Buffet success justify the in investment in GEICO above the market price
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GEICO Corporation in the long term strategic goal of Berkshire Hathaway
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GEICO senior management style compare to Berkshire Hathaway management
Buffet shared his philosophy of investment throughout the years, in his CEO letter to the shareholders in Berkshire Hathaway’s annual report,