MGMT 648: APPLIED FINANCE
Spring 2001
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?