Business Case Studies & Business Publications

Warren E. Buffett, 1995

Bruner, Robert F.

Case

Warren E. Buffett, 1995

Bruner, Robert F.

F-1160 | Published October 11, 1996 | 17 pages Case

Collection: Darden School of Business

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Set in August 1995, this case enables students to assess Berkshire Hathaway's bid for the 49.6% of GEICO Corporation that it does not already own. Students perform a simple valuation of GEICO shares, and consider the reasonableness of the 26% acquisition premium. There are no obvious synergies, and Berkshire Hathaway has announced that it will run GEICO with no changes. Student analysis can include the investment philosophy and remarkable record of Berkshire's CEO, Warren E. Buffett. The case was prepared for use as an introduction to a finance course or a module on capital markets. The analytical tasks are straightforward, and are intended to provide a springboard for a discussion of the main tenets of modern finance. Thus, the case can be used to (1) set some of the important themes at the beginning of a finance course, including risk and return, economic reality (i.e., not accounting reality), the time value of money, and the benefits of alignment of agents and owners; (2) link concepts of valuation and corporate finance to the behavior of investors in the capital market; (3) through the use of an exemplar (Buffett), hint at the nature of best practice in management and investment (one can return to the image of Buffett repeatedly during a finance course to ask students what he would likely do in a situation); (4) build the notion of stock prices equaling the present value of future equity cash flows; and (5) exercise simple equity valuation skills using DCF analysis.