Warren E. Buffett, 2015

Abstract

This case was designed as an introduction to a finance course or a module on capital markets. Alternatively, it could be used as a basic introduction to methods of valuing a firm. A detailed teaching note provides instructors with a teaching plan for either scenario. Set in August 2015, students are asked to evaluate Warren Buffett's decision to acquire the aerospace-parts supplier Precision Castparts Corporation (PCP), which would be the largest-ever deal for Berkshire Hathaway, Buffett's holding company. Excerpt UVA-F-1769 Rev. Nov. 8, 2017 Warren E. Buffett, 2015 On August 10, 2015, Warren E. Buffett, chair and CEO of Berkshire Hathaway Inc., announced that Berkshire Hathaway would acquire the aerospace-parts supplier Precision Castparts Corporation (PCP). In Buffett's largest deal ever, Berkshire would purchase all of PCP's outstanding shares for $ 235 per share in cash, a 21% premium over the trading price a day earlier. The bid valued PCP's equity at $ 32.3billion. The total transaction value would be $ 37.2billion, including assuming PCP's outstanding debt—this was what analysts called the “enterprise value.” “I've admired PCP's operation for a long time. For good reasons, it is the supplier of choice for the world's aerospace industry, one of the largest sources of American exports,” Buffett said. After the announcement, Berkshire Hathaway's Class A shares moved down 1.1% at market open, a loss in market value of $ 4.05billion. PCP's share price jumped 19.2% at the news; the S&P 500 Composite Index opened up 0.2%. Exhibit 1 illustrates the recent share-price performance for Berkshire Hathaway, PCP, and the S&P 500 Index. Exhibit 2 presents recent consolidated financial statements for the firm. The acquisition of PCP, Berkshire Hathaway's largest deal ever, renewed public interest in its sponsor, Buffett. In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated net worth of about $ 66.5billion according to Forbes), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth for Berkshire Hathaway of 21.6% from 1965 to 2014), Berkshire Hathaway paid him only $ 100,000 per year to serve as its CEO. While Buffett and other insiders controlled 39.5% of Berkshire Hathaway, he ran the company in the interests of all shareholders. “We will not take cash compensation, restricted stock, or option grants that would make our results superior to [those of Berkshire's investors],” Buffett said. “I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to.” . . .