Berkshire Hathaway and Geico: An M&A Case Study

Abstract

Purpose: This paper illustrates the use of the modern Graham and Dodd valuation methodology as a corporate M&A tool by way of case study.

Design/methodology/approach: The paper presents a case study of the 1995 Berkshire Hathaway acquisition of GEICO and draws on previously published Graham and Dodd methodological materials as well as GEICO's publicly available financial information. The valuation presented in the case is the sole work of the authors.

Findings: While Graham and Dodd-based valuation is a popular investment methodology it has thus far received scant attention as a corporate M&A tool. The results of the GEICO case suggest that Graham and Dodd valuation could be applied successfully to corporate M&A.

Practical and research implications: We explain modern Graham and Dodd valuation in the context of Berkshire Hathaway's 1995 GEICO acquisition. We demonstrate how that acquisition contained a reasonable margin-of safety, or price discount to estimated intrinsic value, even though it was taken private at a 25.6 percent premium over the $55.75/share market price at the time. The case demonstrates the practical utility of Graham and Dodd-based valuation in corporate M&A, and provides recommendations for its use in that context.

Originality/value: While Graham and Dodd valuation has been well covered from an investment perspective this is the first work, as far as we are aware, that seeks to apply it to corporate M&A.

Keywords: Valuation, mergers and acquisitions, Franchise, Growth

JEL Classification: G22, G34