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Warren E. Buffet, 1995 Case Study

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Introduction

Warren E. Buffet, 1995 Case Study Berkshire Hathaway has made a bid for the remaining shares of GEICO. This report reviews the offer made by Warren Buffet and will try to prove that the acquisition of GEICO will serve the long-term goal of Berkshire Hathaway and the bid price was appropriate. Furthermore, it will explain what may have caused for the share price increase for Berkshire Hathaway at the announcement of GEICO's acquisition. Would the GEICO acquisition serve the long-term goals of Berkshire Hathaway? In 1976, Warren Buffet paid $45.7 million for 34.25 shares of GEICO. Review of GEICO's historical dividends shows that GEICO has been a very profitable investment for Berkshire Hathaway. The growth rate for 1994 is a sharp increase, but even if the growth rate for 1994 is not considered, GEICO's historical increase in dividends has been considerably high so that acquisition of GEICO will serve the long-term goals of Berkshire Hathaway. ...read more.

Middle

of 26.4% including the 1994 cash flow or 14.9% without 1994 cash flow on the Scott & Fetzer investment. Clearly, Warren Buffet's positive investment performance carried a significant weight and influences the market to have a more optimistic outlook on his investments. Conversely, his historical records of investment success do add value to shareholders trust. Was the bid price appropriate? GEICO Corp was selling for $55.75 at the time Warren Buffet and Berkshire Hathaway made an offer of $70 including a 26% premium over the current GEICO stock price. One would expect that what appeared to be an overprice bid would lead to a negative market reaction. On the contrary, Berkshire Hathaway's shares closed up 2.4% for the day for a gain in market value of $718 million after the announcement. ...read more.

Conclusion

Using the risk adjusted discount rate to discount the Value Line projections, GEICO's stock price is assessed to be at $58.32 under the low projections and $79.85 under the high projections which makes the offer price of $70 to be inline with Value Line projection. Agency Theory Agency theory is the theory of the relationship between principals (shareholders) and agents (managers), and that there is a potential conflict of interest between principals and agent if their goals are not aligned. In the case of Berkshire Hathaway, there appears to be no conflict of interest between principals (shareholders) and agents (Warren Buffet as the manager) since Warren Buffet as Berkshire Hathaway' manager has a personal interest in the company, therefore, is trusted by shareholders to act in their best interest as he would for himself and ensures that the company continues to grow and maintain profitability. 1 Buffet Case Study ...read more.

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