MGMT 648: APPLIED FINANCE

Spring 2001

Warren E. Buffet, 1995

 
 

Each Team is to prepare a 2-4 page written analysis of the case.You may also include any charts, figures, or spreadsheet printouts as appropriate.

This case investigates Berkshire Hathaway’s bid for the remainder of GEICO Corporation that it does not already own.The main task is to evaluate the reasonableness of the of the 26 percent acquisition premium.In addition this case provides a good opportunity to discuss Buffet’s investment style and philosophy.

Key questions and concepts that your team should address:

1.On the day of the acquisition announcement, there was a significant change in the share prices for Berkshire Hathaway.What does the gain in Berkshire’s share price imply about the intrinsic value of GEICO.(Note that Berkshire already owned 33.25M shares before the acquisition was announced)

2.Based on Value Line’s forecasted information, what is the range of possible intrinsic values for GEICO?

3.How well has Berkshire Hathaway performed as a whole ?In its investment in Scott and Fetzer?In its initial purchase of GEICO stock?In convertible preferred securities?

4.How does Warren Buffet define intrinsic value?How is it estimated?Why does Buffet reject alternatives to intrinsic value?

5.Critically assess Buffet’s investment philosophy – where do you agree and disagree with him?

6.Should the shareholders of Berkshire Hathaway endorse the acquisition of GEICO?