Essay Instructions: Master's Program, Course "Financial Issues for Managers"
The case study is from Case Studies in Finance,,Managing for Corporate Value Creation, Fourth Edition, author Robert F Bruner, The McGraw-Hill/Irwin serioues in fiance, in0surance and real estate
Instructions....see the case below to read and the instructions at the end of the case.
Case-Warren E. Buffett, 1995
On Agust 25, 1995, Warren Buffett, the CEO of Berkshire Hathaway, announced that his firm would acquire the 49.6 percent of GEICO Corporation that it did not already won. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price b efore the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particulary since Buffet proposed to change nothing about GEICO, and there were no apparent synergies in the combination of the two firms. At the announcement, Berkshire Hataway's shares closed up 2.4 percent for the day, for a gaiin in market value of $718 million. That day, the S&P 500 Index closed up 0.5 percent.
The acquisition of GEICO renewed pubolic interest in its archit4ect, Warren Buffett. In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $7 billion), he was also respect4ed and even beloved. Though he had accumulated perhaps the best investment record in history ( a compound annual increase in wealth of 28 percent from 1965 to 1994). Berkshire Hathaway paid him only $100,000 per year to serve as its CEO. Buffett and other insiders controlled 47.9 percent of the company, yet he ran the company in the interests of all shareholders. He was the subject of numerous laudatory articles and three biographies, yet he remained an intensely private individual Though acclaimed by man y as an intellectual genious, he shunned the company of intellectuals and preferrred to affect the manner of a down-home Nebraskan (he lived in Omaha), and a tough-mined investor. In contrast to other investment "stars" Buffet acknowledged his investment failures quickly and publicly. Though he held an MBA frtom Coluymbia University and credited his mentor, Professor Benjamin Graham, with developing the philosophy of value-based investing that guided Buffett to hisw success, he chided business schools for the irrelevance of their theories, of fiance and investing.
Numerous writers sought to distill the essence of Buffett success. What were the key principles that guided Buffett? Could these be applied broadly ini the late 1990"s and into the 21st century, or were they unique to Buffett and his time. From an understanding of these princi;les, analysts hope to illuminate Berkshire Hathaway's acquisition of GEICO.
Instructions-complete and submit a 350-700 word report analyzing and responding to the three questions below. Also, briefly discuss agency theory and how it applies to Berkshire Hathaway's management and shareholders.
Under what assumptioons, would this acquisition make sense? What were Buffett's probable motives in the acquisition? Would the acquistions of GEICO prove to be a success? How would it compare to the firm's other recent invesments in Salomon Brothers, USAurm, anad Champion International?