Recommendation a Vote for Approval of the Acquisition of Pacificorp

Memo #1

Subject: Recommendation a vote for approval of the acquisition of PacifiCorp.

I recommend approval of the acquisition of PacifiCorp.

Total Assets Turnover Rate

From 2004 to 2005, the TA turnover rate decreased from 0.2736 to 0.2435, which decreased about 11%. However, the industry average TA turnover rate is 0.375, which is about 35% higher than PacifiCorp in 2005. A low total asset turnover could indicate that the firm's sales are sluggish and the reason of sluggish can be excess capacity. After Warren Buffett acquired PacifiCorp, the excess capacity can be used up for other business purpose. Therefore, without extra capacity, both enterprise value and common stock will increase. In table 2, the assumption is total asset turnover rate will rise by 6% annually. Compared to the result from Table 1, results from Table 2 show that the enterprise value increases by 1.02 and common stock increases by 3.61. Based on these observations, acquisition of PacifiCorp can increase total assets turnover and increase enterprise value. In Warren Buffett's philosophy, he is more concerned about economic reality rather than accounting reality. Increasing total assets turnover by reducing excess capacity is on the economic and operation reality of a business. This chance is change of business itself instead of market change, which is consistent with Buffett's Philosophy.

Intrinsic Value

On the date of acquisition, the $2.14 billion gain was noticed by Berkshire Hathaway. In the first day of the acquisition, the gain showed almost 23% return on the initial investment, which means the intrinsic value of PacifiCorp exceeded the book value paid for the acquisition. Assuming a 20% return on equity for five-year-investment and 15% cost of equity, Berkshire Hathaway would be looking at a $1.24 market value for each dollar invested. Warren Buffett believes investing in simple companies with excellent growth potential and an intrinsic value that will clarify is the investment will be profitable. By using discounted cash flow analysis, assuming WACC is 30-year-bond price (Buffet's concept) and dividend from PacifiCorp to its preferred shareholders is $2 million beginning in 2007. The intrinsic value is about 5.56 billion, which is lower than the bid price because of the unpredictability of recession in 2008. Therefore, looking at the steady growth PacifiCorp has produced with MidAmerican Energy, the future should be successful.

Shareholders

The deal to acquire PacifiCorp by MidAmerican Energy Holdings Company resulted in increasing of stock price for both Berkshire Hathaway and Scottish Power. One reason behind this success is stockholder's supports and interests in Berkshire Hathaway and Scottish Power. The sudden

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