File Name: berkshire hathaway and geico an m a case study .zip
Case Studies in Finance links managerial decisions to capital markets and the expectations of investors. At the core of almost all of the cases is a valuation task that requires students to look to financial markets for guidance in resolving the case problem. These cases also invite students to apply modern information technology to the analysis of managerial decisions. Visit the Online Learning Center at www.
The financial world set a record in for mergers and acquisitions. The author has an explanation for this persistent failure and offers a way forward. Acquirers, he notes, tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability.
The trouble is, if you spot a valuable asset or capability in a company, others will too, and the value will be lost in a bidding war. But if you have something that will make the acquisition more competitive, the picture changes.
As long as the acquired company is incapable of making that enhancement on its own or ideally with any other company, the buyer, rather than the seller, will earn the rewards.
Martin describes four ways to enhance the competitiveness of a target:. Companies tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability, for example. But if you spot opportunity in a company, others will too, and the value will be lost in a bidding war. Look for ways to give value to the acquired company rather than take it—by being a smarter provider of capital, offering better managerial oversight, transferring a skill, or sharing a resource.
These approaches have been behind the handful of deals that have succeeded. The value of such deals eclipsed the previous record, set in , which had surpassed an earlier peak in This is perhaps not auspicious: It seems pace the late Prince that we are partying as if it were —and to boot. Why is that so? The answer is surprisingly simple: Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.
This insight echoes one from Adam Grant, who notes in his book Give and Take that people who focus more on giving than on taking in the interpersonal realm do better, in the end, than those who focus on maximizing their own position. That was the case in all the disasters just cited. Microsoft and Google wanted to get into smartphone hardware, HP wanted to get into enterprise search and data analytics, News Corp.
When a buyer is in take mode, the seller can elevate its price to extract all the cumulative future value from the transaction—especially if another potential buyer is in the equation. But in addition, none of them understood their new markets, which contributed to the ultimate failure of those deals.
If you have something that will render an acquired company more competitive, however, the picture changes. Creating value by being a better investor works well in countries with less-developed capital markets and is part of the great success of Indian conglomerates such as Tata Group and Mahindra Group.
Even GE has slimmed down considerably. But even in developed countries, being a better investor gives scope for creating value. In new, fast-growing industries, which experience considerable competitive uncertainty, investors that understand their domain can bring a lot of value. In the virtual reality space, for example, app developers were confident that Oculus would be a successful new platform after Facebook acquired it, in , because they were certain that Facebook would provide the requisite resources.
Another way to provide capital smartly is to facilitate the roll-up of a fragmented industry in the pursuit of scale economies. This is a favorite tool of private equity firms, which have earned billions using it. In such cases, the smarter provider of capital is usually the biggest existing player in the industry, because it brings the most scale to each acquisition until returns on scale max out.
Of course, not all fragmented industries have the potential to deliver scale or scope economies—a lesson learned the hard way by the Loewen Group Alderwoods after bankruptcy. Loewen rolled up the funeral home business to become the biggest North American player by far, but its size alone created no meaningful competitive advantage over local or regional competitors.
Often they arise through the accumulation of market power. After eliminating competitors, the big players can charge higher prices for value delivered. For two of the biggest proposed deals of , however, the jury is still out. This, too, may be easier said than done. Supersuccessful, high-end, Europe-based Daimler-Benz thought it could bring much better general management to modestly successful, midmarket, U.
As long as the U. But when that sectorwide party came crashing to a halt during the global financial crisis, GE Capital nearly brought the whole of General Electric to its knees. Berkshire Hathaway has a long track record of buying companies and boosting their performance through its management oversight, but not many other convincing corporate examples exist.
Danaher may be the best one. For the system to be successful, Danaher asserts, it must improve competitive advantage in the acquired company, not just enhance financial control and organization. And it must be followed through on, not just talked about. Despite this outstanding growth and performance, Danaher is in the process of splitting into two separate companies under the baleful eye of the activist hedge fund Third Point. An acquirer can also materially improve the performance of an acquisition by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.
The skill should be critical to competitive advantage and more highly developed in the acquirer than in the acquisition. A closer examination, however, suggests that thus far it has been a pretty expensive mistake. It was as hot as a smoking pistol and had many other potential joint venture partners. But Disney needed Pixar: Its biggest successes in animation in the previous decade were its joint-venture projects with that company. It had little to give and lots to take—and paid an extraordinary price for the pleasure.
Clearly, this method of adding value requires that the acquisition be closer to home than not. The fourth way is for the acquirer to share, rather than transfer, a capability or an asset.
With some acquisitions, it also shares a powerful brand—for example, Crest for the SpinBrush and Glide dental floss. But it had no valuable capability to share when it bought the handset business from Nokia. And even if Time Warner had limited itself to giving AOL preferential treatment, the other market players might well have retaliated by boycotting its content.
This was not like the acquisition of Oculus, in which Facebook conferred singular status on one of a number of virtual reality contenders. WhatsApp was already by far the leader in global messaging, with million users, when Facebook decided to acquire it. It is, of course, a monumentally successful company. It could have combined WhatsApp and its own application, Messenger, but it has kept them completely separate.
It seems to be based on a fact and a prayer. The prayer is that Facebook will somehow figure out how to monetize those users. That might happen, but the financial bar is staggeringly high. To earn Facebook shareholders a return on the cost of the acquisition, WhatsApp would have to become one of the most profitable software companies on the planet in less than a decade.
First, with the rise in stock-based compensation since the s, the value of a successful acquisition bet is greatly enhanced for the CEO. Furthermore, compensation packages are strongly correlated with the size of the company, and an acquisition makes it bigger. Even failed acquisitions can be personally profitable. The second bias at least in the United States comes from an unlikely source: the Financial Accounting Standards Board.
Before the dot-com bubble burst, in , intangible assets were written off over a year period. With these two drivers providing the liquid lubrication—and the global financial crisis apparently a distant memory—the party is in full swing. That would be the good news. That is a gigantic investment. But history shows that when things turn sour for the base business—think of Nortel, Bank of America, WorldCom, Tyco—shareholders start looking more closely at acquisitions and asking, What were they thinking?
And what the acquirer puts into the deal determines the value that comes out of it. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Stuart Bradford. Martin describes four ways to enhance the competitiveness of a target: Be a smarter provider of growth capital. Provide better managerial oversight. Transfer valuable skills to the acquisition. Share valuable capabilities with the acquisition.
Why It Happens Companies tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability, for example. The Solution Look for ways to give value to the acquired company rather than take it—by being a smarter provider of capital, offering better managerial oversight, transferring a skill, or sharing a resource. The rush toward huge cross-border mergers is based on a faulty understanding of economics.
There are better ways to address globalization than relentless expansion. A version of this article appeared in the June issue pp. Roger L. Partner Center.
The financial world set a record in for mergers and acquisitions. The author has an explanation for this persistent failure and offers a way forward. Acquirers, he notes, tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability. The trouble is, if you spot a valuable asset or capability in a company, others will too, and the value will be lost in a bidding war. But if you have something that will make the acquisition more competitive, the picture changes.
Read the full transcript of the AGM right here on Rev. Try Rev for free and save time transcribing, captioning, and subtitling. Warren Buffett: This is the annual meeting of Berkshire Hathaway. I think most of the people that come to our meeting really come to listen to Charlie. But I want to assure you, Charlie at 96 is in fine shape.
Warren Buffett and GEICO Case Study - Free download as Word Doc Download as DOCX, PDF, TXT or read online from Scribd and Their Radically Rational Blueprint for Success, Boston, MA, Harvard Business School.
Berkshire Hathaway , American holding company based in Omaha , Nebraska , that serves as an investment vehicle for Warren Buffett. In the early 21st century, it was one of the largest corporations, measured by revenues, in the United States. Berkshire Hathaway traces its history back to two Massachusetts textile firms: Hathaway Manufacturing Company incorporated and Berkshire Cotton Manufacturing Company incorporated An investment group led by Buffett took full control of the company in
Benjamin Graham, Becky Quick CNBC : If you could keep one company that Berkshire owns, either a wholly- owned subsidiary, or that Berkshire owns a common equity in, which one would you keep and why? It goes back to the -- 62 years ago it changed my life. It's also a wonderful company. I would have both things going for me, but that if I hadn't of gone to GEICO when I was 20 years-old and had a fellow there explain the insurance business to me, my life would be vastly different.
Benjamin Graham, Becky Quick CNBC : If you could keep one company that Berkshire owns, either a wholly- owned subsidiary, or that Berkshire owns a common equity in, which one would you keep and why? It goes back to the -- 62 years ago it changed my life. It's also a wonderful company. I would have both things going for me, but that if I hadn't of gone to GEICO when I was 20 years-old and had a fellow there explain the insurance business to me, my life would be vastly different. CNBC interview March 13, Two of the greatest "Value" investors of all-time owe a substantial part of their wealth and public reputations and deserved accolades - to a singular great Growth company, the Government Employees Insurance Company GEICO.
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