Case Study Finance 7

I.
EXECUTIVE SUMMARY
Warren Buffett, the CEO of Berkshire Hathaway, is known for his
success in handling different investment. He decided to acquire stocks from

GEICO Corporation which is far beyond the market price. In connection to
these, Warren Buffett incurred loss from his acquisition. The point is as an
investor you need to know the background of the said company before
acquiring stocks. A 26 percent premium that the Berkshire Hathaway would
pay is big enough and a big loss. As a popular investor, one mistake would
probably a big impact to his public image. The time will come that investors
will not believe in him because of his carelessness. He must also be
observant in terms of the historical data of a company because it is one
major source to know if the company is working well or not so that he can
properly decide what to do.
MEMBERS:
AMIGABLE, NIKKI GIORGIA
2013007726
BSBA-
Financial Mgt. 2nd yr.

CANDOL, JEAN KYLE
2013002420
BSBA-Financial
2013003293
BSBA-Financial
2013020411
BSBA-Financial
Mgt. 2nd yr.

CRUIZ, JE ANN
Mgt. 2nd yr.
GARCES, PRINCE JOHN
Mgt. 2nd yr.
1
OVILLE, CHERYL
2011002751
BSBA-Financial Mgt.
4th yr.
REVIL, CHELSEA DAWN
2013005433
BSBA-Financial
Mgt. 2nd yr.
DUE DATE: FEBRUARY 16, 2015
II.
STATEMENT OF THE PROBLEM
Warren Buffetts decision to acquire GEICO at a 26% premium

compared to the market price.
Warren Buffett who was the CEO of Berkshire Hathaway announced that
his firm would acquire the 49.6% of GEICO Corporation that it did not already
own. The GEICO deals with $ 2.3 billion that would give them $ 70.00 per
share up from the $ 55.75 per share market price before the announcement.
The change of stock price of Berkshire Hathaway during the day of
announcement, wherein the shares of GEICO were undervalued at a price of
$ 55.75 while the Berkshire Hathaway has paid $ 14.25 premium per share.
Even though Berkshire Hathaway pays the share, the fair value of GEICO
Corporation was higher than the price, but the shareholders could not lower
it down.
When the intrinsic value of GEICO was higher than the price that was sold,
the Berkshire Hathaway also increased its market value by $ 718 billion.
2
III.
CAUSES OF THE PROBLEM

Warren E. Buffet, CEO of Berkshire Hathaway acquired directly to
GEICO Corporation without reviewing the firms or company's historical data

which was a very risky thing to do with an investment as big as that. Since
there is no assurance that it will synergies the two firms. He proposed to the
firm he acquired that there would be no charged happening. He's not too
aware to do the background check before acquiring a percentage of share to
the GEICO Corporation because of instead gaining an asset it rather declined
or lead to losing the assets. According to the observers, he need to do a
splitting and others but he refused to split the firm's share price, to make it
accessible to the other investor. He disagrees with the conventional wisdom
that investors should place money in a variety of investments that are
unrelated. Another thing is, him being different from what a usual investor
does, he disagrees with the thought of placing money in a variety of
investments that are unassociated, which is generally accepted by investors
and shareholders.
IV.
DECISION CRITERIA AND ALTERNATIVE SOLUTIONS
1. RETAIN FLEXIBILITY investment and growth must keep its flexibility

in the market. Companies dont know when will be the price of stocks
in investments goes up or down. They must be ready all the time, in

order for them not to meet some difficulties or problems in the future.
2. MAINTAIN PROFITABILITY- Company must maintain its profit to
ensure the companys status or condition. Maintaining its own profits
can help to improve the company and its own investment. In this way,
new investors will surely buy stocks in your company to invest.
3. MANAGER AND INVESTOR MANAGEMENT investors must buy
something that is worth it and can operate or generate value to obtain
its investment. Manager should know how to treat his/her investors
properly. Each one of them must show up the value of professionalism.
ALTERNATIVE SOLUTION:
1. DIVERSIFY ONES OWN PORTFOLIO
*ADVANTAGES has higher returns
- reduce long-term risk
- protect investors from localized go down in the market
- Investments become stable
* DISADVANTAGES when the value decreases, the investors will suffer
some amount of loss.
- Increased financial exposure
2. EQUAL DISTRIBUTION OF PROFITS

* ADVANTAGES avoid misunderstandings among investors
- Company is running smoothly
4
- No favoritism
*DISADVANTAGES unfair for the persons who contribute more
V.
RECOMMENDED
SOLUTION,
IMPLEMENTATION
AND
JUSTIFICATION
Warren Buffet, the CEO of Berkshire Hathaway must see to it that all
transactions are properly recorded and carefully analyzed before acquiring a
certain item or stock so that their company will not be declining. In this case
study, I found out that Warren Buffet already purchased stock from GEICO
Corporation in which it cost 70.00 per share and a total of 2.3 billion pesos.
But unfortunately, the dividend per share is only 55.75 per share market
price. Instead of gaining, they are currently losing its assets. Thereby
resulting to a negative NPV (Net Present Value). With this problem they are
facing, they cannot achieve their long-term goals by just one mistake they
have made.
In order to resolve this issues, Warren Buffet must be observant of the
movement of each stocks so that he can determine if the stock is high or low
and if he will purchase the stock or not. He must use his intellectual capacity
to remain competitive in the field of business. He must avoid being careless
with the investment he is holding because he handled the biggest
responsibility as the CEO of Berkshire Hathaway and if the company would
loss he would be greatly affected by it publicly. He was known for his success
in handling different investment and if that would be the case many
5
investors will not believe in his ability to manage a certain business and for
that his reputation for his career will be damage.
VI.
EXTERNAL SOURCING
http://www.termpaperwarehouse.com/essay-on/Warren-Buffet-1995-
Case-Analysis/333254
http://www.google.com.ph/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=10&ved=0CCkQFjAJ&url=ht
tp%3A%2F%2Fwww.slideshare.net%2Findonesiabelajar%2Fwarren-ebuffetpresentation&ei=6gTgVJ2VGseA8gXRsIHgDw&usg=AFQjCNH675gyWA
ZJVXQmDUVqdNhCEtC04w&sig2=hl2MeTP-DPC-Esb6NzK3pQ
http://www.google.com.ph/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CAwQFjAA&url=ht
tp%3A%2F%2Fwww.glowa.ca
%2FExamining_Berkshire_Hathaways_Purchase_of_GEICO.pdf&ei=kkbg
VM_kIMbDmQXN5IK4BA&usg=AFQjCNE7K_NYPYdaRy4Q2qZ3Toa9c8jFM
Q&sig2=192euKtD7X-8wOAXrInMWA
http://www.google.com.ph%2Furl%3Fsa%3Dt%26rct%3Dj%26q%26esrc
%3Ds%26source%3Dweb%26cd%3D2%26ved%3D0CA4QFjAB%26url
%3Dhttp%253A%252F%252Fpruss.narod.ru%252FBuffet95.pdf%26ei
%3DxvbfVO2lB9Xt8AWcn4Fg%26usg
%3DAFQjCNGhjPrtjTVdUzzvNir_8qyWmr0PrQ
%26sig2%3Dl8K3Ycy6PDGqBgTSDB0eBg&h=QAQFmfVvL
http://www.investopedia.com/articles/stocks/08/average-down-dollarcost-average.asp

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What was Warren Buffett's decision regarding GEICO?

What were the causes of the problem with Warren Buffett's decision?

I.

success in handling different investment. He decided to acquire stocks from

Financial Mgt. 2nd yr.

Mgt. 2nd yr.

Mgt. 2nd yr.

DUE DATE: FEBRUARY 16, 2015

STATEMENT OF THE PROBLEM

Warren Buffetts decision to acquire GEICO at a 26% premium

CAUSES OF THE PROBLEM

GEICO Corporation without reviewing the firms or company's historical data

DECISION CRITERIA AND ALTERNATIVE SOLUTIONS

1. RETAIN FLEXIBILITY investment and growth must keep its flexibility

in investments goes up or down. They must be ready all the time, in

2. EQUAL DISTRIBUTION OF PROFITS

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