Warren E Buffett 1995 case study analysis

Finance

Would the GEICO acquisition serve the long-term goals of Berkshire Hathaway? Absolutely, this is a question that anyone who has read about buffet would know was thought out with great consideration, before a single move was made. Reading buffets Investments Philosophies give way to some of the main components that he uses in this important discussion that is also evident in the way this particular transaction is handled. There are eight investment philosophies that Buffet uses in this important decision making process. Buffet looks into the economic reality, not accounting reality. He believes that little information lays in the calculations of an accountant. He views the market, the functionality of the business, etc. Secondly, he considers the cost involved if the investment becomes a losing business investment. In this case, he makes a comparison against another possible investment to determine how it stands up in respect to its comparative. Then he considers value creation, this is where intrinsic value analysis takes place. Here anticipated return is considered and analyzed. Next, a measurement of performance by gain in intrinsic value, not accounting profit is considered. Buffets long-term goal is to maximize the average annual rate per share. Which Buffet has began to do by increasing his bid. By giving a larger bid, he insures that there will be a higher return in the future. Amount the other things considered in this process is risk and discount rates, diversification, investing behavior and self-discipline, alignment of agents and owners.

Was the bid price appropriate? Yes, the bid price is appropriate. In this deal, it is evident that everything has been well thought out. In fact, the bid price could have been increased by about 20% considering the intrinsic value in the company. However, there are reasons that may be unknown to the nonprofessionals as to why that specific bid was placed. In fact through using this idea of "intrinsic Value," one could report with considerable confidence that Buffet anticipated and new that he was in fact increasing the book value of the business by investing more money into the company initially and then through percentages through out the lifetime of the company. This in fact gives Buffet the upper hand to know that his investment will turn around and bring substantial monetary gain to him and his business over the longevity of the business holding.

What might account for the share price increase for Berkshire Hathaway at the announcement? In actuality, Buffet used a simple component that was recognizable through most of his other business purchasing transactions. In all transactions, there would be an increase in the offer per share. Another cause of the increase could be that often interest in a company would significantly increase when Berkshire Hathaway would become involved. Due to being, a well-known substantiated person/company that is significantly known for increasing the value of a company, not necessarily in the short-term but yet using concepts dealing with longevity. In fact, it is evident that when buffet is considering such an accusation that he has increased the dollar per share amount within the12 to 20% range throughout his professional life. Berkshire Hathaway would often pay over market value in a business transaction for several reasons. First, this would give the current shareholders incentive to smoothly transition into a transition of Berkshire Hathaway having over 59% take in that given company. Second, Buffet is known for analyzing projected revenues in a company. As if to show that he would invest such a large amount in price because he knew that he would see the money double, even triple within the first year or two.