What does the stock market seem to be saying about the acquisition of GEICO by Berkshire Hathaway?2....

Question

What does the stock market seem to be saying about the acquisition of GEICO by Berkshire Hathaway?
2. Based on your own analysis, what do you think GEICO is worth on its own (i.e., before acquisition by Berkshire Hathaway)? 3. Well, maybe Buffett is overpaying - does he have a record of this in the past? 4. What are the major elements of Buffett's philosophy? What do they mean? Do you agree with them?
5. Let's return to the basic issue: Is the GEICO acquisition a good deal or bad deal? And why?
6. Do you think shareholders should endorse the acquisition? For those of you who believe GEICO to be a good purchase, what justifies your belief? For those of you who voted "no," why did you oppose?

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David · Accepted Answer

Part 1 
Initial Geico was valued at $ 55 per share but Warren Buffet from Berkshire Hathaway has 
decided to buy 49.6% stock in the company at $ 70, this shows that he is paying around 28% 
premium. Some analyst said that 28% premium paid by Berkshire Hathaway to GEICO is 
way too much although the firm has sound financials but is important to realize that there is 
always uncertainty associated with equity investments. 
Conventional stock market wisdom says that matured companies generally pays less return 
on investment than S&P 500 and average return on SP 500 was around 10%, but buffet 
decided to pay 20% excess premium to Geico. But in past Warren Buffet is known to turn 
around the future of the companies in which he has invested. 
Therefor stock market responded in positive manner and the stock of Berkshire Hathaway 
closed at increase of 2.48% which is a huge gain when we look from the point of view of 
returns in a single day. 
Part 2 
Based on our own analysis we can assess the price of GEICO on the basis of discounted cash 
flow method 
This method of valuation is based on the assumption that the net value of a firm is the 
sum of all cash flows which are expected to be received by a company discounted at 
appropriate rate.

What does the stock market seem to be saying about the acquisition of GEICO by Berkshire Hathaway? 2. Based on your own analysis, what do you think GEICO is worth on its own (i.e., before acquisition...

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