• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Warren E. Buffet, 1995 Case Study

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Structures, Objectives & External Influences section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Structures, Objectives & External Influences essays

  1. Types of business ownership, sources of finance and a case study of Tescos

    Tesco are now the leading hypermarket retailer in four of the five European markets, serving three million customers a week and employing 41,000 people. All four parts of the Tesco strategy, the core UK business, non food, retailing services and International are growing.

  2. External Influences - Business Study Notes

    = UK EXPORTS are cheap for foreigners... IMPORTS are expensive * Strong pound and cheaper imports means lower costs for UK businesses importing raw materials from abroad, but bad for UK exporters * IF a rise in the pound is predicted, businesses can move production abroad to take advantage of

  1. Tesco financial review

    Credit - When a creditor has given you things and you pay them back afterwards. This would also be a could be investment for Tesco as they will not be paying a lot of money back initially, although later on once the business becomes more established they will be earning

  2. Business report on J Sainsbury's.

    At least one partner must have unlimited liability. Private limited Company - many private limited company start as sole trader or partnerships and gradually expand to different ownership, mostly it is family members running the business. Benefits o Business can be kept small o Because of the limited liability, the owners never can lose more then what they have invested.

  1. Business report on Bp Amoco.

    Offers will be made by the external company to buy the necessary amount of shares needed to take over the company, but the owners who may or not be willing to sell their shares, the company will then raise the cost of the company shares they will be getting as much as they can out of it.

  2. A case study of Cadbury Schweppes.

    Basically, the reason is that it costs a great deal of money to be a limited company and there were not enough assets when Schweppes was partnership. Unfortunately, Schweppes did not make significant profit although it was popular and even was awarded the Royal Warrant by Queen Victoria.

  1. Peacocks - case study

    Many legal documents are required. Advertisements in newspapers are needed, and a prospectus needs to be published as a pamphlet or as a spread in a newspaper. Another thing is that original members of the company may loose control if new members of the company bring in more shares than them.

  2. Are dividends and share repurchases substitutes?

    THEORETICAL BASE (MM) In order to ease the understanding of the following discussion of the different viewpoints, this paragraph will introduce the problem of dividend policy by means of the Miller-Modigliani (MM) (Ross, Westerfield & Jaffe, 2002, p.407, 416)

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work