Case Study of Warren E. Buffet :: Business Management Studies

Case Study of Warren E. BuffetIn 1995 Berkshire Hathaway has do a bid for the shares of GEICO.This report reviews the offer made by Warren Buffet and will try toprove that the acquisition of GEICO will dress the long-term goal ofBerkshire Hathaway and the bid price was appropriate. Furthermore, itwill explain what may have caused for the share price increase forBerkshire Hathaway at the announcement of GEICOs acquisition.Would the GEICO acquisition serve the long-term goals of BerkshireHathaway?In 1976, Warren Buffet paid $45.7 million for 34.25 shares of GEICO.Review of GEICOs historic dividends shows that GEICO has been avery profitable investment for Berkshire Hathaway. The growth step for1994 is a sharp increase, but even if the growth rate for 1994 is notconsidered, GEICOs historical increase in dividends has beenconsiderably high so that acquisition of GEICO will serve thelong-term goals of Berkshire Hathaway.What might account for the share price increase for Berkshire Ha thawayat the announcement?Review of Warren Buffets historical investment success might explainthe increase in share price for Berkshire Hathaway at theannouncement. Given that he has had a good track record, it is anticipate that shareholders respond positively. In 1977, the price ofBerkshire Hathaway was $89 closing at $25,400 by 1995, an unparalleledannual growth of 37.7%. In comparison, the growth rate of the S&P 500over the same period was 14.3%. Warren Buffets formidable investmentperformance was also demonstrated when Berkshire Hathaway acquiredScott & Fetzer. Berkshire Hathaway paid $315 million for Scott &Fetzer in 1985 after which they received significant dividends. Again,Buffets investment performance on the acquisition of Scott & Fetzeroutperformed the S&P 500 evident by an indwelling rate of return (IRR)of 26.4% including the 1994 cash flow or 14.9% without 1994 cash flowon the Scott & Fetzer investment.Clearly, Warren Buffets positive investment performance carried as ignificant weight and influences the market to have a more optimisticoutlook on his investments. Conversely, his historical records ofinvestment success do add re apprize to shareholders trust.Was the bid price appropriate?GEICO Corp was selling for $55.75 at the time Warren Buffet andBerkshire Hathaway made an offer of $70 including a 26% aid overthe current GEICO stock price. One would expect that what appeared tobe an overprice bid would lead to a negative market reaction. On thecontrary, Berkshire Hathaways shares unappealing up 2.4% for the day for again in market value of $718 million after the announcement. Thegains effect was twofold it increased the value of GEICO shares(34.25 million) Berkshire Hathaway already owned and it also made the