Case Study

On 24 May, 2005, Warren E. Buffett, the chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathway, would acquire the electric utility PacificCorp. MidAmerican would purchase PacifiCorp from its parent, Schottish Power plc, for $5.1 billion in cash and $4.3 billion in liabilities and preferred stock.

At the announcement, Berkshire Hathaway's Class A shares closed up 2.4% for the day, for a gain in market value of $2.55 billion. Scottish Power's share price also jumped 6.28% on the news.

Question-1:

What is the possible meaning of the changes in stock price for Berkshire Hathaway and Scottish Power plc on the day of the acquisition announcement?

Question-2:

Specifically, what does the $2.55 billion gain in Berkshires market value of equity imply about the intrinsic value of PacifiCorp?