Page 3 ‘ase }1| Warren E. Buffett, 2015 ‘On August 10, 2015, Warren E. Buffett, chair and CEO of Berkshire Hathaway Inc., announced that Berkshire Hathaway would acquire the aerospace-parts supplier Precision Castparts Corporation (PCP). In Buffett's largest deal ever, Berkshire would purchase all of PCP’s outstanding shares for $235 per share in cash, a 21% premium over the trading price a day earlier. The bid valued PCP’s equity at $32.3 billion! The total transaction value would be $37.2 billion, including assuming PCP’s outstanding debt—this was what analysts called the “enterprise value.” “I've admired PCP’s operation for a long time. For good reasons, itis the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports,”? Buffett said, After the announcement, Berkshire Hathaway's Class A® shares moved down 1.1% at market open, a loss in market vale of $4.05 billion. PCP’s share price jumped 19.2% at the news®; the S&P 500 Composite Index opened up 0.2%. Exhibit 1.1 illustrates the recent share-price performance for Berkshire Hathaway, PCP, and the S&P 500 Index. Exhibit 1.2 presents recent consolidated financial statements for the firm. EXHIBIT 1.1 | Relative Share Price Performance of Berkshire Hathaway Class A Share, PCP, and the SeP 500 Jamary 1, 2015, to August 13, 2 015 ~ Pane Eos 8 ! Daca souree: Google Finance EXHIBIT 1.2 | Berkshire Hathaway Condensed Consolidated Pinancial StatementsTomer icstpernne canes ee ces) fenne ‘sua700 S1s2500 © ste2z00 «$194.70 Oper erase faa 13us'0 1771300 tains, ces perse c, unless erase see rene s 20 $2180 storsco ote 19st0 ago 84a ‘wanes Shree Cae ‘Greet tn ‘$3400 sar sassto Tlie aedsecten egety $0200 The acquisition of PCP, Berkshire Hathawa Buffett, In many ways, he was an anomaly. One of the richest individuals in the world (with an estimated s largest deal ever, renewed public interest in its sponsor, “Page 4 net worth of about $66.5 billion according to Forbes), he was also respected and even beloved. Though he had accumulated perhaps the best investment record in history (a compound annual increase in wealth for Berkshire Hathaway of 21.6% from 1965 to 2014). Berkshire Hathaway paid him only $100,000 per year to serve as its CEO, While Buffett and other insiders controlled 39.5% of Berkshire Hathaway, he ran the company in the interests of all shareholders. “We will not take cash compensation, restricted stock, oF option grants that would ‘make our results superior to [those of Berkshire’s investors],” Buffett said. “I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to.”2 Btfett was the subject of numerous laudatory articles and at least eight biographies, yet he remained an intensely private individual. Although acclaimed by many as an intellectual genius, he shunned the company of intellectuals and preferred to affect the manner of a down-home Nebraskan (he lived in Omaha) and a tough ‘minded investor. In contrast to the investment world’s other “stars,” Buffett acknowledged his investment failures both quickly and publicly. Although he held an MBA from Columbia University and eredited his mentor, Benjamin Graham, with developing the philosophy of value-based investing that had guided Buffet to his, suecess, he chided business schools for the irrelevance of their finance and investing theories. ‘Numerous writers sought to distill the essence of Buffet’s success. What were the key principles that guided Buffett? Could those principles be applied broadly in the 21st century, or were they unique to Buffett and his time’ By understanding those principles, analysts hoped to illuminate the acquisition of PCP. What were Buflett’s probable motives in the acquisition? What did Buflett’s offer say about his valuation of PCP, and how would it compare with valuations for other comparable firms? Would Berkshire’s acquisition of PCP prove to be asuccess? How would Buffett define success? Berkshire Hathaway Inc. Berkshire Hathaway was incorporated in 1889 as Berkshire Cotton Manufacturing and eventually grew to become one of New England's biggest textile producers, accounting for 25% of U.S. cottonsteatile production, In 1955, Berkshire Cotton Manufacturing merged with Hathaway Manufacturing and began a secular decline due to inflation, technological change, and intensifying competition from foreign rivals. In 1965, Buffett and some partners acquired control of Berkshire Hathaway, believing that its financial decline could be reversed. Over the next 20 years, it became apparent that large capital investments would be required for the company and that even then the financial returns would be mediocre. Fortunately, the Paws to remain comp textile group generated enough cash in the early years to permit the firm to purchase two insurance companies headquartered in Omaha: National Indemnity Company and National Fire & Marine Insurance Company. Acquisitions of other businesses followed in the 1970s and 1980s; Berkshire Hathaway exited the tive, textile business in 1985. The investment performance of a share in Berkshire Hathaway had astonished most observers. As shown in Exhibit 1.3, a $100 investment in Berkshire Hathaway stock on September 30, 1976, would compound to a value of $305,714 as of July 31, 2015, approximately 39 years later. The investment would result in a 305,614% cumulative return, 22.8% when annualized. Over the same period, a $100 investment in the S&P 500 would compound to a value of $1,999 for a cumulative return of 1,899.1% or 8.0% annualized ® Index over 39 Years EXHIBIT 1.3 | Berkshire Hathanay Semen | ‘109000 | = — —= - poe jroo ative stwoy e:Cam Pace 0 eee 2 te Pp Prrr Pr im = Tevaary 1, 20S te Taly 51, BOTs In 2014, Berkshire Hathaway's annual report described the firm as “a holding company owning subsidiaries engaged ina number of diverse business activities.”® Berkshire Hathaway's portfolio of businesses included: » Insurance: Insurance and reinsurance!” of property and casualty risks worldwide and with reinsurance of life, accident, and health risks worldwide in addition (e.g., GEICO, General Re). + Railroad: A long-lived asset with heavy regulation and high capital intensity, the company operated one of the ems in North America (i.e., BNSF). largest railroad s» Utilities and Energy: Generate, transmit, store, distribute, and supply energy through the subsidiary Berkshire Hathaway Energy company. + Manufacturing: Numerous and diverse manufacturing businesses were grouped into the industrial products, (2) building products, and (3) consumer products (e.g., Lubrizol, PCP). + Service and Retailing: Providers of numerous services, including fractional aircraft-ownership programs, aviation pilot training, electronic-components distribution, and various retailing businesses, including automotive dealerships (e.g., Netlets, Nebraska Furniture Mart). + Finance and Financial Products: Manufactured housing and related consumer financing; transportation ‘equipment, manufacturing, and leasing; and furniture leasing (e.g., Clayton Homes, ULTX, XTRA), Exhibit 14 gives a summary of reven Berkshire Hathaway’s various business segments. The company's investment portfolio also included equity operating profits, capital expenditures, depreciation, and assets for interests in numerous publicly traded companies, summarized in Exhibit 1.5 Page 6 EXHIBIT 1.4 | Bosiness-Segnent Information for Berkshire Hatharay Inc. (ollars_in willions) cst Sort evs sar Bomnatace ——_Deneton Tot sts tere Gems $ ase $sess $75 $6267 $94 $5 $G$ 77 smIBA2 seIsast ann Sore Sasiae S4en 34a0a $4az $102 $90 $ sm suse Sait Sete sera Seoote $ 75m Sion $227 $ m2 $ 91 $ oD Sem $67 22170 fos, Saw $ noe Sor Sor Ssavo bsest sue Sis Sonat S oon yy Simste $teza1 $27 $2as1 Sess f sere $2177 saast $7402 § 74201 Francestronen Paice $525 $ Soe $ m9 $2000 $957 $276 $ eZ $ 610 Ss2I68 $ aan $ 20m s sore sass $s $$ Scores seo SOLGTT_SHOEN ARGS SETA WEE ODE SS SSE IOUSHS SREY EXHIBIT 1.5 | Investees of Berkshire Hathaway (dollars in nillions) Shee company ‘Gerad ota onion 151610700 Amante Comp 18 18:08 2462778 oon/s comma 2 2364 sen a703s3—wateruod Gvoay 4 25506 Taal Common Sods aed stat rae boon required under GAAP rules Source: Berkshire lathanay Ine. letter to shareholders, 2014Buffett's Investment Philosophy Warren Buffett was first exposed to formal training in investing at Columbia University, where he studied under Benjamin Graham, A coauthor of the classic text, Security Analysis, Graham developed a method of identifying undervalued stocks (that is, stocks whose prices were less than their intrinsic value). This became the cornerstone of modern value investing. Graham's approach was to focus on the value of assets, such as cash, net working capital, and physical assets. Eventually, Buffet! modified that approach to focus also on valuable franchises that were unrecognized by the market. ‘Over the years, Buffett had expounded his philosophy of investing in his chair’s letter to shareholders in Berkshire Hathaway's annual report. By 2005, those lengthy letters had acquired a broad following because of their wisdom and their humorous, self-deprecating tone. ‘The letters emphasized the following elements: Economic reality, not accounting reality. Financial statements prepared by accountants conformed to rules that might not adequately represent the economic reality of a business. Buffett wrote: Because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. Charlie [Munger, Bufett’s business partner] and I, both as owners and managers, virtually ignore such consolidated numbers ... Accounting consequences do not influence our operating or captal-allocation u process.tl Accounting reality was conservative, backward looking, and governed by generally accepted accounting principles (GAAP), even though investment decisions should be based on the economic reality of a business. In economic reality, intangible assets such as patents, trademarks, special managerial expertise, and reputation might be very valuable, yet, under GAAP, they would be carried at little or no value, GAAP measured results, of cash, Akey feature of Buffett’s approach defined economic reality at the level of the business itself, not the ‘market, the economy, or the security—he was a fundamental analyst of the business. His analysis sought to judge the simplicity of the business, the consistency of its operating history, the attractiveness of its long-term. prospects, the quality of management, and the firm's capacity to create value. in terms of net profit, while in economic reality the results of a business were its flow: ‘The cost of the lost opportunity. Buffett compared an investment opportunity against the next-best alternative, the lost opportunity. In his business decisions, he demonstrated a tendency to frame his choices as either/or decisions rather than yes/no decisions. Thus an important standard of comparison in testing the attractiveness of an acqui rate of return from investing in the common stocks of other companies. Buffett held that there was no fundamental difference between buying a business outright and buying a few shares of that business in the equity market. Thus for him, the comparison of an investment against other returns available in the market was an important benchmark of performance. Page 7 on was the potenti Embrace the time value of money. Buffett assessed intrinsic value as the present value of future expected performance: [All other methods fall short in determining whether] an investor is indeed buying something for what itis worth and is therefore tray operating on the principle of obtaining value for his investments ... Irrespective of whether a business ‘grows or deesn’t, displays volatility or smoothness in earnings, or carries a high price or low in relation to its current earnings and book value, the investment shown by the discounted-flows-of-cash calculation to be the cheapest isthe one that the investor should purchase.!2Enlarging on his discussion of intrinsic value, Buffett used an educational example: We define intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. Anyone calculating intrinsic value necessarily comes up with a highly subjective figure that will change both as estimates of future cash flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value i all important and isthe only logical way to evaluate the relative attractiveness of investments and businesses. Ta see howhistorical input (book value) and future output (intrinsic value) can diverge, let us look at another form of investment, a college education. Think of the education’s cost a its “book value.” If it is to be accurate, the cast should include the earnings that were foregone by the student because he chose college rather than ajob, For this exercise, we ‘will ignore the important non economie benefits of an education and focus strictly on its economic value, First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that figure an estimate of what he ‘would have earned had he lacked his education. That gives us an excess earnings figure, which must then be discounted, at ‘an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic economic value of the education, Some graduates will find that the book value of their education exceeds its intrinsic value, which means that whoever paid for the education didn’t get his money’s worth, In other eases, the intrinsic value of an education will far exceed its book value, a result that proves capital was wisely deployed. In all eases, what is clear is that book value is meaningless as an indicator of intrinsic value. ‘To illustrate the mechanics of this example, consider the hypothetical case presented in Exhibit 1.6. Suppose an individual has the opportunity to invest $50 million in a business—thi This business will throw off cash at the rate of 20% of its investment base each year. Suppose that instead of receiving any dividends, the owner decides to reinvest all cash flow back into the business—at this rate, the book value of the business will grow at 20% per year. Suppose that the investor plans to sell the business for its book value at the end of the fifth year. Dees this investment create value for the individual? One determines this by discounting the fiture cash flows to the present at a cost of equity of 15%. Suppose that this is the investor's opportunity cost, the required return that could have been earned elsewhere at comparable risk. is its cost or book value, Dividing the present value of future cash flows (i.e., Buffet’s intrinsic value) by the cost of the Page 8 investment (i.., Buffett’s book value) indicates that every dollar invested buys securities worth $1.23 Value is created. ical Example ue Creation Consider an opposing case, summarized in Exhibit 1.7. The example imilar in all respects, except for ifference: the annual return on the investment is 10%. The result is that every dollar invested buys ‘one key securities worth $0.80. Value is destroyed.EXWIBI ical Example of Value Destruction wea 1shot$et $4000 Comparing the two cases in Exhibits 1.6 and 1.7, the difference in value creation and destruction is driven centirely by the relationship between the expected returns and the discount rate: in the first case, the spread is positive; in the second case, itis negative. Only in the instance where expected returns equal the discount rate will book value equal intrinsic value. In short, book value or the investment outlay may not reflect the economic reality. One needs to focus on the prospective rates of return, and how they compare to the required rate of return, Measure performance by gain in intrinsic value, not accounting profit. Buflett wrote: ‘Our long-term economic goal ... is to maximize Berkshire’s average annual rate of gain in imrinsie business value on 8 per-share basis, We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future—a greatly enlarged capital base wil see to that. But we will be disappointed if our rate doesnot exceed that ofthe average large American corporation, a The gain in intrinsic value could be modeled as the value added by a business above and beyond the charge for the use of capital in that business. The gain in intrinsic value was analogous to the economic-profit and ‘marketevalue-added measures used by analysts in leading corporations to assess financial performance. Those ‘measures focus on the ability to earn returns in excess of the cost of capital Set a required return consistent with the risk you bear. Conventional academic and practitioner thinking held that the more risk one took, the more one should get paid. Thus discount rates used in determining intrinsic values should be determined by the risk of the cash flows being valued. The conventional model for estimating the cost of equity capital was the capital asset pricing model (CAPM), which added a risk premium to the long- term risk-free rate of return, such as the U.S. Treasury bond yield. In August 2015, a weighted average of Berkshire Hathaway's cost of equity and debt capital was about 0.8%.15 Buffett departed from conventional thinking by using the rate of return on the long-term (¢.g., 30-year) U ‘Treasury bond to discount cash flows—in August 2015, the yield on the 30-year U.S. Treasury bond was 2.89%. Defending this practice, Buffett argued that he avoided risk, and therefore should use a risk-free discount rate. His firm used little debt financing. He focused on companies with predictable and stable Page 9 ‘earnings. He or his vice chair, Charlie Munger, sat on the boards of directors, where they obtaineda candid inside view of the company and could intervene in management decisions ifnecessary. Buffett once said, “I puta heavy weight on certainty, If you do that, the whole idea of a risk factor doesn’t make sense to meRisk comes from not knowing what you're doing.”! He also wrote: We define risk, using dictionary terms, as “the possibility of loss or injury.” Academics, however, like to define “risk” differently, averrng that it isthe relative volatility ofa stock or a portfolio of stocks—that is, the volatility as compared to that of a large universe of stocks. Employing jatabases and statistical kills, these academies compute with precision the “peta” of astock—its relative volatility inthe past—and then build arcane investment and capital allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: it is better to be approximately right than precisely wrong.!? Diversify reasonably. Berkshire Hathaway represented a diverse portfolio of business interests. But Buffett disagreed with conventional wisdom that investors should hold a broad portfolio of stocks in order to shed. company-specific risk In ‘one exceptional company, Buffett said: view, investors typically purchased far too many stocks rather than waiting for Figure businesses out that you understand and concentrate. Diversification is protection against ignorance, but if you don’t feel ignorant, the need for it gees down drastically.!8 Invest based on information, analysis, and self-discipline, not on emotion or hunch. Buffett repeatedly emphasized awareness and information as the foundation for investing, He said, “Anyone not aware of the fool in the market probably is the fool in the market.”1° Buffett was fond of repeating a parable told to him by Graham: ‘There was a small private business and one of the ovmers was a man named Market. Every day, Mr, Market had a new opinion of what the business was worth, and a that price stood ready to buy your interest or sell youhis. As excitable as he ‘was opinionated, Mr. Market presented a constant distraction to his fellow owners. “What does he know?" they would ‘wonder, ashe bid them an extraordinarily high price or a depressingly low one. Actually the gentleman knew little or nothing. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest ofthe time, you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about ils operation and financial position? Page 10 Buffett used this allegory to illustrate the irrationality of stock prices as compared to true intrinsic value. Graham believed that an investor’s worst enemy was not the stock market, but oneself. Superior training could Over the long term, stock prices not compensate for the absence of the requisite temperament for investin should have a strong relationship with the economic progress of the business. But daily market quotations were heavily influenced by momentary greed or fear and were an unreliable measure of intrinsic value. Buffett said: [As far as Lam concerned, the stock market doesn’t exist. Ii there only asa reference to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses. You simply have to behave according to what is rational rather than according to what is fashionable.*! Accordingly, Buffett did not try to “time the market” (ie., trade stocks based on expectations of changes in the market cycle) —his was a strategy of patient, long-term investing. As ifin contrast to Mr. Market, Buffett expressed more contrarian goals: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”"22 Buffett also said, “Lethargy bordering on sloth remains the comerstone of our investment style,”25 and “The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do."24Look for market inefficiencies. Buffett scorned the academic theory of capital-market efficiency. The cefficient-markets hypothesis (EMH) held that publicly known information was rapidly impounded into share prices, and that as a result, stock prices were fair in reflecting what was known about the company. Under EMA, there were no bargains to be had, and trying to outperform the market would be futile. “It has been helpful to me to have tens of thousands turned out of business schools that taught that it didn’t do any good to think,” Buffett said.25 | think i's fascinating how the ruling orthodoxy can cause @ lot of people to think the earth is flat, Investing in a market “where people believe in efficiency is like playing bridge with someone who's been told it dasn't do any good to look at the cards 26 . Align the interests of agents and owners. Explaining his significant ownership interest in Berkshire Hathaway, Buffett said, “I am a better businessman because [ am an investor. And I ama better investor because Iam a businessman.”27 As ifto illustrate this sentiment, he said: ‘Amanagerial “wish list” will not be filled at sharcholder expense. We will not diversify by purchasing entire businesses at control prices that jgnore long-term economic consequences to our shareholders, We will only do with your “Page Ti ‘money what we would do with our own, weighing fully the values you can obtain by diversifying your own portfolios through direct purchases in the stock market28 For four out of six Berkshire directors, more than 50% of the family net worth was represented by shares in Berkshire Hathaway. The senior managers of Berkshire Hathaway subsidiaries either held shares in the company or were compensated under incentive plans that imitated the potential returns from an equity interest in their business unit, or both.2? Precision Castparts ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine —Benjamin Graham®® The vote was in and the market’s reaction to Berkshire Hathaway's acquisition of PCP indicated disapproval. The market ascribed $4.05 billion less value to Berkshire Hathaway after the announced acquisition than before it, At the same time, the value of PCP jumped more than $5 billion, close to 20% of the market value of the firm. ‘The market seemed to be saying that Buffett and Berkshire had overpaid for the busines Buffett didn’t seem to think so. And despite his age, he didn’t appear to be slowing down, PCP was the largest acquisition ina string of large purchases over the past several years, including Duracell, Kraft, Heinz, and Burlington Northern Santa Fe, totaling more than $70 billion in deal value in all. These acquisitions, along with many more over the years, followed a similar blueprint (Exhibit 1.8). The gist of the acquisition criteria seemed to be relatively straightforward—Berkshire Hathaway looked for well-run businesses producing . As Berkshire Hathaway stated in its press release following the PCP consistent results offered at a fair price acquisition: EXHIBIT 1.8 | Berkshire Hathaway Acquisition Criteriaene copes au force ret pean sai nase at met the owing es 1 Lage cia ist $7 mn ops samnge uns esas on of our ng ns 2 Cota cong pewe donesile awe pases fo Ht us hs fe aN STS 4 enero urng geet ene py a ak 4. Magma nace cane 8) § ergs srw cute ies ng en tra aon {a $20 ion age care hts however Wncewy sugeton cbt suctose: we mg mse Doser nact mance ibn onan murray tase Ye en priae camps cnhiily and avatar axioms onb ndor sewer mee Fit erie to ay reek owl coer ah ‘Sokunetnascone sr mocnrimems ne an aw ave an eterno (Ghat fear or apps tet autos ut came cose wary ou eS WEE fount you sdence antec bomg calles act bao Ww a hapog ase ure ce ‘arn Apa rom acu ong eurmes ang soar ore ardor ante oe ron te pas cont yuna tee ‘Sarees Berkaire Tubaway Ine. annval Teper, 207% PCP fits perfectly into the Berkshire model and wil substantially increase our normalized per-share earning power. Under CEO Mark Donegan, PCP has become the world’s premier supplier of aerospace components (most of them destined to be original equipment, though spares are important othe company as well) Mark's accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable Israeli manufacturer of cutting tools The two men transform ‘ery ordinary raw materials into extraordinary products that are used by major manufacturers worldwide, Bach isthe da Vinei of his craft. PCP’s products, often delivered under multiyear contracts, ae Key components in most large aircraft 1 Fee PCP manufactured complex metal components and products for very specific applications, mainly in the critical aerospace and power applications. The components were used in products with highly complex engineering processes, such as large jet-aircraft engines. Its customer base was concentrated and sophisticated, including General Electric, Pratt & Whitney, and Rolls-Royce, for whom they had been supplying castings for ‘multiple decades.22 Exhibit 1.9 presents PCP’s income statement and balance sheet ending March 31, 2015. Exhibit 1.10 provides financials on comparable firms, Exhibit 1.11 provides valuation multiples for comparable firms. The beta of PCP, measured afler the acq tion announcement, was 0.38. EXHIBIT 1.9 | PCP Consolidated Financial Statements12 Man Eng Man rmers cept persrae x, ness bere seca) Oparng een a ean Coediednalmcmterccrig spate’ = ash ETS rms eceptper sue a, ness ere secs) Neterepa pan andequpnen en & Sharda Egy Poneonsnaton Sereno ey Tlie an sctiteneasty Note = Fiscal pour onde Warch 31, Ported Uiated as QUI Teprasonte Wareh 97, OIA to March 31, 2018 Note: The market value of PCP" s equlty shortly before the anpouncezeat of the acquisition by Berkshire Hathovay was $51,208 ri Tion Daca source: Edgar bee ludes cavity in unconsolidated investaonts %Egeludes noacostzol lag interest. EXHIBIT 1.10 | Comparable Pirms Pika Pe ae (eater mon conpsmy "O'S" tow Hoh_—Shate Aes Ubimes uly Ott O6e_ Dek Rov_EBTDA EBT eae “asss——~«U2IG7-§ [S77 & 16CD SoIz Su700 Gzz605 LETT $ 62 S070 $5mTS GIO00S SDSS6 SzNEE S202 ts! 580 $1120 $2050 037 $1307 $17 $1 $ 46 $ 286 § fal $1307 $163 § 13t Sat Tnymentnmp sins $ Wee § 20es SOM Seiser SSLIKE SetZe SiO Soot SIEID Setabe SLU SaNe SAD ‘Teamobues 087 $ 2650 § 3541 S072 S.GsE9 $2951 5 20S 18 SISO Si2s7 Sa2m Sim sos a, caener Sedwnboy _S21 $6175 $6225 $077 $ 2051 $1553 $ 1m $0 $ os $ 4s $2171 $30 8 77 Sm Cromre 1418 S20nes Spits $987 Sioaag $ ear) $ 474 S1069 s4p7 SutT2 stom $2077 S602 S150 ‘Water Dollar valuse are iw willvons excopt for thats prices and dividends per sare, ehich are Iw dollar unite, Sha foutstanding (0/8) are stated in millions. packaging, oil and gas, dofonse, snd industrial applieations LISH SA enpages in the menufactaring of multifunctional fasteners and ssseably components for three business sectors Aerospace, Automotive, and Wedienl TWSSEMKELPP AG engages in the production of steel. The Componencs Technology business aree offers components for the ALLEGHENY TECHNOLOGIES, TNC, engagos I tho aanuCacturo of specialty gaterials and components for different Industries, which include aerospace and defense, ofl and ga, and chesical processing, x well as electrical ens CARPENTER TECHOLOGY CORP, ongages in ceveloping, manufacturing, and distributing cast/erought and powder-netal stainless steels. It operates through Specialty Alloys Operations and Fervoraance Engineered Products segseacs ata sourees: Company reports: Factsct EXHIBIT 1. 11 | Valuation of PCP Based on Multiples for Conparnble Firxsnap ve ‘Wy oe ew Piel comgeny wy ewapese soak wa Wat Book tel Soe ety “Mate Vote | mov estoa a neon at |etsme Va 1 [ase sraea7 Seaver Srossa|s22008 sasse Saies soon] osx 6st 1060) esex 12% 2 [ust size $151 spools ta07 3 182 $131 § at] tice Tace t15m| sGaer tae 4 | eaten Tecirooges [5 tae $2168 $ 2sve]s 42m $ 202 $ 106 9] o7ce 1126 s00m] nat ose ecm [8 1527 $2220 ¢ r226|s 2172 3 om $ 212s 120 10% sosms| so25e 12% «| Near SS taoe $3163 § 2ssa[s azn § sar $212 $ ta] OG ast toon] taste 12 7 |i sss7o $ acco § assa|svusea suai $ 700 $ w2| osu 7am t4sta| 200m 15% 8 | mpi vate waa $9705 siacss sasei|szusse siacse 9 | Inge vine nee seaoe_szuzie sanzss|san7z2 $1786 nedian value SIT ($87,755 aillion) Conclusion “The announcement of Berkshire Hathaway's acquisition of PCP prompted some he multiples of Per) Economist magazine wrote, fe derlved onparable firms (line #) and auleiplies 1% times the wuleiplos (Line §). For instance, by aulUiplyiag 14.51 (Uke scan 2 he implied valve ba sultiple ‘on the nodian moltiple o relevant base (revenue, EBITDA, far the comparable Clas) ince $2,602 itical commentary. The But [Buffett] is far from a model for how capitalism should be transformed. He is a careful, largely ethical accumulator of capital invested in traditional businesses, preferably with oligopolistic qualities, whereas what America nceds right now is ‘more risk-taking, lower prices, higher investment and much more competition. You won't find much at all about these ideas in Mr, Buffett's sharcholderletters.33 Conventional thinking held that it would be difficult for Warren Buffett to maintain his record of 21.6% annual growth in shareholder wealth. Buffett acknowledged that “a fat wallet is the enemy of superior investment results.”®5 He stated that it was the firm’s goal to meet 2 15% annual growth rate in intrinsic value. Would the -P acquisition serve Berkshire Hathaway's long-term goals? Was the bid price appropriate? How did Berkshire Hathaway's offer measure up against the company’s valuation implied by the multiples for comparable firms? Did Berkshire Hathaway overpay for PCP? Was the market's reaction rational?” Or did Buffett pay a fair price for a great business? If'so, what determines a fair price? What makes a great business? And why would Berkshire Hathaway be interested in buying PCP? Why would PCP be interested in selling itself to Berkshire Hathaway? What value did Berkshire Hathaway bring to the equation?