Warren Buffett is well known as the richest person alive and the world’s greatest investor. His investment philosophies have been researched, applied, and then researched again by investors hoping to follow in his footsteps to value-investing nirvana. For all the acclaim he has garnered over the years, perhaps he is not given enough credit; not as an investor, but as a business manager. From the mid 1950’s to 1969, Warren Buffett was an investment manager in the traditional sense as the manager of several investment partnerships. When the Buffett Partnership was dissolved in 1970, his 29% controlling interest in a failing textile business allowed him to appoint himself as Chairman of Berkshire Hathaway. Over time, Berkshire Hathaway transformed from a failing textile business into a thriving conglomerate holding company. As a business manager, Warren Buffett treated corporate decision-making the same way that he treated his partnership investments. Buffett’s investment expertise has translated astonishingly well into corporate management, particularly in the area of capital allocation. When asked about his abilities, Buffett mused: “I was born wired to allocate capital well”. Successful capital allocation is arguably the most important and necessary function of any business manager. By looking at how Buffett treated capital allocation as manager of Berkshire Hathaway, we can gain valuable insight that can be applied to almost any business. This case looks at the capital allocation decision to purchase PacifiCorp as an investment.
II. Background
Berkshire Hathaway was incorporated in 1899 as a small New-England-based textile producer called Berkshire Cotton Manufacturing. It subsequently grew to become very successful, accounting for a quarter of all U.S. cotton ...