Warren E. Buffett Case

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Case Study 2: Warren E. Buffett, 1995 This case was prepared by Professor Robert F. Bruner as the basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. On August 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 own. The $2.3 billion deal would give GEICO shareholders $70.00 per share, up from the $55.75 per share market price before the announcement. Observers were astonished at the 26 percent premium that Berkshire Hathaway would pay, particularly since Buffett proposed to change nothing about GEICO, and there were no apparent synergies in the combination of…show more content…
On August 25, 1995, the firm’s closing share price was $25,400. In comparison, the annual average total return on all large stocks from 1977 to the end of 1994 was 14.3 percent.4 Over the same period, the Standard & Poor’s 500 index grew from 107 to 560. Some observers called for Buffett to split the firm’s share price, to make it more accessible to the individual investor. He steadfastly refused. In 1994, Berkshire Hathaway described itself as ‘a holding company owning subsidiaries engaged in a number of diverse business activities.’5 Exhibit 1 gives a summary of revenues, operating profits, capital expenditures, depreciation, and assets for the various segments. By 1994, Berkshire’s portfolio of businesses included the following: Figure 1: Share Price of Berkshire Hathaway versus SIP 500 Index [pic] • Insurance Group. The largest component of Berkshire’s portfolio focused on property and casualty insurance, on both a direct and a reinsurance basis. The investment portfolios of the Insurance Group included meaningful equity interests in 10 other publicly traded companies. The equity interests are summarized in Exhibit 2, along with Berkshire’s share of undistributed operating earnings in these companies. Because the earnings in some of these companies could not be consolidated with Berkshire’s under generally accepted accounting principles (GAAP), Buffett published Berkshire’s ‘lookthrough’ earnings6—as shown in Exhibit

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