Berkshire Hathaway Case Study

The following memo analyzes MidAmerican’s potential acquisition of PacifiCorp. Contents included involve a financial analysis, qualitative analysis, valuation, and acquisition recommendation.

After careful review, MidAmerican should acquire PacifiCorp at the current offering price of $9. 4 billion ($5. 1 billion in cash and $4. 3 billion in attached liabilities and preferred stock). Financial Analysis The financial statement comparison between MidAmerican and PacifiCorp reveals similarities, but there are key differences. Between 2000 and 2004, MidAmerican’s assets have doubled reaching nearly $20 billion.

PacifiCorp has also increased the total amount of assets to $12. 5 billion between 2004 and 2005. Both companies have consistently increased the amount of liability, which Berkshire Hathaway is not usually known for. Between 2000 and 2002, MidAmerican increased liabilities from $5 billion to over $10 billion. Differences surface when comparing the income statements.

While MidAmerican has consistently increased revenues over the years, PacifiCorp has not in the two years of information provided. MidAmerican has increased from $4 billion to over $6. 5 billion. PacifiCorp has struggled, decreasing revenues by approximately $150 million.Both MidAmerican and PacifiCorp’s costs and expenses have trended consistently with revenues.

PacifiCorp seemed to outperform MidAmerican in 2004 reporting net income of $252 million. MidAmerican unfortunately had a significant loss on discontinued operations of over $350 million. The following table shows the financial similarities and differences in more detail.MidAmerican20002001200220032004PacifiCorp20042005Assets$11,681$12,626$18,435$19,145$19,904Assets$11,677$12,521Liabilities$10,105$10,918$16,141$16,374$16,933Liabilities$8,357$9,144Revenue$4,013$4,973$4,903$6,143$6,727Revenue$3,195$3,049Expenses$3,859$4,554$4,380$5,416$5,911Expenses$2,577$2,393Net Income$81$143$380$416$170Net Income$248$252Qualitative AnalysisManagement within PacifiCorp seems to be performing well, which is exactly the type of team that Buffet wants to keep in place. Being a low-cost energy producer, PacifiCorp runs a simple business. More complex businesses are riskier to invest in.

MidAmerican would acquire PacifiCorp for $5. 1 billion in cash and $4. 3 billion in liabilities and preferred stock. Buffet has specific criteria that must be met in order to acquire a company and PacifiCorp meets his criterion. Buffet’s complete acquisition qualification criterion is as follows:1) Large purchases (at least $75 million in pretax earnings).2) Demonstrated consistent earning power.

3) Businesses earning quality returns on equity while employing little or no debt.4) Management in place.5) Simple businesses (limited technology).6) An offering price (avoid acquisitions when price is unknown) Valuation After reviewing the proposed purchase price of $9. 4 billion for PacifiCorp and the valuation multiples of comparable regulated energy firms, the purchase price may be on the high end.

The implied book value of PacifiCorp is only $3. 4 billion. Although $4. 3 billion of the purchase price is attached liabilities and preferred stock, Buffet would still pay $1.7 billion more in cash than the implied book value.Also, the implied EPS is only $0.

81, whereas the rest of the comparable regulated energy firms all exceed $1. 40. The median and mean EPS are much higher, as the chart shows below. Considering the lower implied EPS and the lower implied book value, the purchase price should not be as high as it is. The minimal return does not justify one of Buffet’s largest purchases in history. PacifiCorp Implied EPS: $0.

81 Lowest Comparable EPS $1. 42 (Alliant) Highest Comparable EPS $2. 62 (Wisconsin) Median EPS $2. 15 Mean EPS $2. 06.

RecommendationAlthough the proposed purchase price seems overpriced (for reasons explained in the Valuation section), MidAmerican should move forward with the acquisition of PacifiCorp. The company performs well with managing its expenses and has not closed any recent operations, unlike MidAmerican. MidAmerican is the larger company, which can become more profitable by acquiring PacifiCorp. The low EPS was a mentioned concern, but should improve with the assistance of MidAmerican and the Berkshire Hathaway organization.

Moving the PacifiCorp name under a Berkshire Hathaway subsidiary should receive a positive reaction from the market.