This 4 page paper responds to three specific questions: Did the GEICO acquisition serve the long term goals of Berkshire Hathaway? Was the price appropriate? What could account for the increase in share price for Berkshire on the day the acquisition was announced? The writer also comments on how agency theory applies to Berkshire's management and determine, Buffett's approach is contrary to agency theory. Bibliography lists 2 sources.
Name of Research Paper File: MM12_PGbufr.rtf
Unformatted Sample Text from the Research Paper:
Buffett took a salary of only $100,000 and yet, in 1995, Buffett was worth over $7 billion, one of the richest persons in the world. His wealth came from shrewd
investments. Additionally, he and other insiders of Berkshire Hathaway owned 47.9 percent of the company. Many of the companys acquisitions had surprised Wall Street types but the acquisition of
GEICO Corporation was fodder for analysts to once again try to figure out Buffetts thinking, especially, since Buffett did not intend to change anything about GEICO. The two corporations had
no synergies that analysts could see. This made this particular acquisition all the more puzzling. Since the analysts and so-called experts had been reading Buffetts annual letters to stockholders and
reviewing the companys reports, they were only surprised because they never did understand that Buffett and other executives operated Berkshire Hathaway "in the interests of all shareholders" (Bruner, 1996). This
focus on earning value for all shareholders was contrary to operating in the interest of top executives who held stock shares and/or options. Buffetts actions flew in the face of
agency theory. Donaldson and Davis (1991) explain that agency theory shareholder interests have to be protected against the companys governance structure, that there must be a separation of the roles
of the CEO and board. In other words, agency theory says that management will not operate in the interest of shareholders without some sort of personal incentive and this is
why the roles must be separated (Donaldson and Davis, 1991). The board of directors is supposed to be guarding the shareholders rights and earnings (Donaldson and Davis, 1991). Buffett, however,
did protect shareholders rights and earnings. He did nothing that would not, in the long run, benefit shareholders. Most of what Buffett did was contrary to what other companies did