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FIN 490
Joe, Sam, John, Rashed
Ancell Consulting Group
Berkshire Hathaway and
PacifiCorp
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Itinerary
History/ Background - Rashed
Asset Allocation - Rashed
Buffets Investment Philosophy - Sam Methodology - Sam
MidAmerican Energy - Joe
PacifiCorp - John
Recommendation - John
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Background
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Berkshires Portfolio of business
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Buffets Investment Philosophy
1) Economic reality, not accounting reality
2) Cost of lost Opportunity
3) Value creation: time is money
4) Measure performance by gain in intrinsic value,
notprofits
5) Risk and discount rates
6) Diversification7) Investing driven by info, analysis and
self-discipline
8) Alignment of agents and owners
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Time money of projected cash flows
0 1 2 3 4 5
ROE
20%
COE15%
$9.4 $11.28 $13.54 $16.24 $19.49 $23.39
Value Creation
0 1 2 3 4 5
ROE
10%
COE
15%
$9.4 $10.34 $11.37 $12.51 $13.76 $15.14
Value Destruction
0
5
10
15
20
25
Value Creation Value Destruction
Market book value created: $1.24
Market book value destroyed: $0.80
PacifiCorp
(amount in billions)
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MidAmerican financials
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MidAmerican Net Earning Growth vs.
Return on Revenue
Year % Growth on
revenue return
2000 0
2001 38%
2002 92%
2003 138%
2004 27%
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Share price performance of Berkshire
and Scottish Power
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Comparable Regulated Energy Firms
Beta Shares O/S Market
Cap
Net
Income
Alliant
Energy0.85 115.74 $3026.60
$164Cinergy
Corp0.85 187.53 $7266.79 $404
NSTAR 0.70 106.55 $2658.42 $190
SCANACorp
0.75 113.00 $4096.25 $264
WisconsinEnergy 0.70 116.99 $3749.53 $306PacifiCorp 0.77 312.18
$5508.16 $252
Firms and their performance
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Return on Assets and Debt Ratio
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Valuation for Pacific Corp.
and Berkshire Hathaway
Basis Enterprise Values
In Millions
Revenue $6,584
EBIT $9,289
EBITDA $9,076
Net Income $7,553
Berkshire Hathaway
Beta = 0.75
Risk Free (2004) = 5.76%
CAPM = 9.315%
Historical Return = 24%
AcquisitionValue Added = $2,010
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Conclusion
Low risk of corporate greed
High levels of intrinsic value
Track record
Investor confidence
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