This case deals with the decision of Warren Buffet of Berkshire Hathaway to purchase the aerospace parts supplier Precision Castparts Corporation or PCP. Should Berkshire Hathaway’s shareholders endorse the acquisition of PCP?
Robert F. Bruner and Jake DuBois
Harvard Business Review (UV7243-PDF-ENG)
January 31, 2017
Case questions answered:
- Who is Warren E. Buffett? How would you describe the business of Berkshire Hathaway?
- How well has Berkshire Hathaway performed? Over the long term? Recently?
- What is your assessment of Berkshire Hathaway’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo?
- Prepare to describe the elements of Buffett’s investment philosophy. How might this philosophy differ from that of other investment styles, such as a very active day trader, chart watcher, or someone who passively invests in index funds?
- From Buffet’s perspective, what is intrinsic value? Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Warren Buffett reject them?
- In this section, I will be expressing my opinion about Warren Buffet’s investment philosophy, whether I agree, disagree, or both with his 8 investment philosophies. Critically assess Buffett’s investment philosophy. Be prepared to identify points where you agree and disagree with him.
- What is the possible meaning of the changes in stock price for Berkshire Hathaway on the day of the acquisition announcement? Specifically, what does the $4 billion loss in Berkshire Hathaway’s market value of equity imply about the intrinsic value of Precision Castparts Corporation (PCP)?
- Should Berkshire Hathaway’s shareholders endorse the acquisition of PCP?
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Warren E. Buffett, 2015 Case Answers
1. Who is Warren Buffett? How would you describe the business of Berkshire Hathaway?
Warren Buffett is among the most renowned investors globally. He is currently the chairman and CEO of Berkshire Hathaway Inc.
Berkshire Hathaway Inc. is an investment firm that primarily focuses on purchasing stocks from prospective undervalued companies to capitalize on “intrinsic value.” This, according to Warren’s own words, is “the discounted value of the cash that can be taken out of business during its remaining life.”
In simplest terms, his strategy revolves around “buy low, sell high.” He is well-known for his value investing strategy and his proficiency in outperforming the stock market.
Forbes has listed the investor on its billionaire list, so of course, he is among the richest entrepreneurs on the planet. His understanding of the market and strategy implementation revolves around ‘Economic Reality’ instead of accounting reality.
Warren Buffett believes that accounting statements are conservative based on accrual methods that create vast differences compared to actual cash flows.
2. How well has Berkshire Hathaway performed? Over the long term? Recently?
Based on the balance sheet, depicted by exhibit 2 – its consolidated net income doubled from the year 2011 to 2014, with only improvements in the net income during this time frame.
Also, the current assets increased by 36% from 2011 to 2014, which is impressive. The firm has diversified its stock portfolio by investing in multiple firms based in different industries, putting it in a more risk-averse position.
The case’s exhibit 3 shows that over a period of thirty-nine years, Class A shares price level rose from $100 per share to about $250,000 per share, which is an outstanding increase rate of about 2499000%, making it the most expensive publicly traded company ever.
Based on 2015, $117,470 million was the total market value of the firm. The case pinpoints that after Berkshire Hathaway acquired Precision Castparts Corporation, their Class A Share price level dropped by 1.1%, with a total loss in market value of over 4 billion dollars.
However, such a scenario isn’t very concerning as firms do manage to bounce back in time. The noteworthy aspect here is that Shareholder equity increased by 43.4%.
By the end of the 2nd quarter, it reported $46.54 billion in short-term investments in Treasury bills, which are considered the safest form of investment, and 64.56 billion stored as cash and cash equivalents. The data shows that its immediate short-term liquidity is solid and can very well manage against the threat of insolvency.
3. What is your assessment of Berkshire Hathaway’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo?
The amount invested by Warren Buffett in these four firms was a wise decision as they were established within the market for a brief time period, controlling a good portion of their respective markets.
Projection odds can turn it to be more…
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