Warren Buffet Case
Team 12 | Case Analysis: Warren Buffett and Berkshire Hathaway’s acquisition of GEICO | By: Maryam Abathi, Jesper Eriksson, Andrew Klotz, Lorenzo Manera, Stanislav Sobolev, | | | |
Financial Management Case Analysis at Hult International Business School 2012-2013 |
A) What is the possible meaning of the changes in stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement?
Specifically, what does the $718 million gain in Berkshire’s market value of equity imply about the intrinsic value of GEICO?
Valuation of GEICO
Warren Buffet bought the company of GEICO for 70$ per share, which he estimated to an appropriate price for the purchase of the company. Warren Buffet is focused on the future cash flow that GEICO may generate, and use this to value the company before a purchase of stocks.
The acquisition of GEICO shows that Warren Buffet had a big confidence in the company, which he also mentions in the note:
* Seven largest auto insurer.
* Extraordinary senior managers that may provide additional depth to Berkshire Hathaway’s senior management bench
*the lowest-cost insurance provider in the industry.
Warren Buffet believed that GEICO was undervalued on the stock market and that they were stronger than what the current stock price said.
He had also had his eyes on the company since as early as 1951, when he made his first investment in the company. GEICO was a company that Buffett were comfortable with and which he had followed closely for over four decades, which follows his investment philosophy to aim for long-term investments. With the insight in the company and the way that GEICO performed businesses compared to other insurance companies it had performed very well previously. NYTimes reported on the 26th of August, 1995 that “Geico, the country 's sixth-largest car insurer, has been a solidly profitable company in recent years with a good record for low losses and low expenses in comparison with
Financial Management Case Analysis at Hult International Business School 2012-2013 |
A) What is the possible meaning of the changes in stock price for GEICO and Berkshire Hathaway on the day of the acquisition announcement?
Specifically, what does the $718 million gain in Berkshire’s market value of equity imply about the intrinsic value of GEICO?
Valuation of GEICO
Warren Buffet bought the company of GEICO for 70$ per share, which he estimated to an appropriate price for the purchase of the company. Warren Buffet is focused on the future cash flow that GEICO may generate, and use this to value the company before a purchase of stocks.
The acquisition of GEICO shows that Warren Buffet had a big confidence in the company, which he also mentions in the note:
* Seven largest auto insurer.
* Extraordinary senior managers that may provide additional depth to Berkshire Hathaway’s senior management bench
*the lowest-cost insurance provider in the industry.
Warren Buffet believed that GEICO was undervalued on the stock market and that they were stronger than what the current stock price said.
He had also had his eyes on the company since as early as 1951, when he made his first investment in the company. GEICO was a company that Buffett were comfortable with and which he had followed closely for over four decades, which follows his investment philosophy to aim for long-term investments. With the insight in the company and the way that GEICO performed businesses compared to other insurance companies it had performed very well previously. NYTimes reported on the 26th of August, 1995 that “Geico, the country 's sixth-largest car insurer, has been a solidly profitable company in recent years with a good record for low losses and low expenses in comparison with