17 Pages Posted: 21 Oct 2008
Set in August 1995, this case enables students to assess Berkshire Hathaway's bid for the 49.6% of GEICO Corporation that it does not already own. Students perform a simple valuation of GEICO shares, and consider the reasonableness of the 26% acquisition premium. There are no obvious synergies, and Berkshire Hathaway has announced that it will run GEICO with no changes. Student analysis can include the investment philosophy and remarkable record of Berkshire's CEO, Warren E. Buffett. The case was prepared for use as an introduction to a finance course or a module on capital markets. The analytical tasks are straightforward, and are intended to provide a springboard for a discussion of the main tenets of modern finance. Thus, the case can be used to (1) set some of the important themes at the beginning of a finance course, including risk and return, economic reality (i.e., not accounting reality), the time value of money, and the benefits of alignment of agents and owners; (2) link concepts of valuation and corporate finance to the behavior of investors in the capital market; (3) through the use of an exemplar (Buffett), hint at the nature of best practice in management and investment (one can return to the image of Buffett repeatedly during a finance course to ask students what he would likely do in a situation); (4) build the notion of stock prices equaling the present value of future equity cash flows; and (5) exercise simple equity valuation skills using DCF analysis.
Rev. Jul. 1, 2015
Warren E. Buffett, 1995
On August 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6% of GEICO Corporation that it did not already own. The $ 2.3 billion deal would give GEICO shareholders $ 70 per share, up from the $ 55.75 per share market price before the announcement. Observers were astonished at the 26% premium that Berkshire Hathaway would pay, particularly as Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hathaway's shares closed up 2.4% for the day, for a gain in market value of $ 718 million. That same day, the S&P 500 Index closed up 0.5%.
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Keywords: cash flow, valuation, efficient markets, investment analysis
Suggested Citation: Suggested Citation
Bruner, Robert F., Warren E. Buffett, 1995. Darden Case No. UVA-F-1160. Available at SSRN: https://ssrn.com/abstract=909388
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