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Q1. Based on the text below from Berkshire Hathaway’s annual report 2016, how would you describe Berkshire Hathaway Automotive Group, Inc.’s main business?
Berkshire Hathaway, annual report 2016:
“In the first quarter of 2015, Berkshire acquired a group of affiliated companies referred to as the Berkshire Hathaway Automotive Group, Inc. (BHA). BHA is the 4th largest automotive retailer in the United States, currently operating 109 new vehicle franchises through 83 dealerships located primarily in major metropolitan markets in the United States. The dealerships sell new and used vehicles, vehicle maintenance and repair services, extended service contracts, vehicle protection products and other aftermarket products. BHA also arranges financing for its customers’ through third-party lenders. BHA operates 31 collision service centers directly connected to the dealerships’ operations and owns and operates two auto auctions and a fluid maintenance products distribution company. Dealership operations are highly concentrated in the Arizona and Texas markets, with approximately 70% of dealership related revenues derived from sales in these markets. BHA currently maintains franchise agreements with 27 different vehicle manufacturers, although it derives a significant portion of its revenue from the Toyota/Lexus, General Motors, Ford/Lincoln, Nissan/Infiniti and Honda/Acura brands. Over 85% of BHA’s revenues are from dealerships representing these manufacturers.”
Description of main business
Berkshire Hathaway Automotive Group, Inc. sells new and used vehicles using dealerships located primarily in major metropolitan markets and franchise agreements with 27 different vehicle manufacturers.
What is missing from this description?
Q2. Multi-business firm Xandou has 3 businesses. To investigate the existence of corporate advantage, which thought experiment would you do?
Q3. A corporate strategy based on selection of businesses, without modification of businesses, is more likely to work in inefficient financial markets.
Q4. You are working at the headquarters of Maia Magnificent, which produces mountaineering and ski equipment. Your CEO has asked you to calculate the enterprise value and equity value per share. What is your answer?
You have collected the following information. CHF stands for Swiss Francs.
Information on Maia Magnificent:
– Net debt: CHF 50 mln
– Number of shares: 10 mln
Information on businesses, last year’s earnings (adjusted for headquarter costs):
– Mountaineering equipment: CHF 8 mln
– Ski equipment: CHF 6 mln
Information on peers, enterprise value to earnings multiple:
– Mountaineering equipment: 10
– Ski equipment: 12
Q5. The share price of multi-business firm Wow! is $10.00. Using the average earnings multiples of focused peers, a sum-of-the-parts analysis gives an equity value per share of $8.70. From just this information, which conclusions are we most comfortable making?
Q1. You are the Chief Executive Officer (CEO) and considering a diversification. Your Chief Financial Officer (CFO) recommends an acquisition, whereas an external advisor recommends an alliance. Historically, your company has been equally successful in acquisitions as in alliances. Should you therefore be indifferent between these two options?
Q2. After a careful analysis of Alpha (a company active in business A) and Beta (a company active in business B), you conclude that (i) synergies exist between Alpha and Beta and that (ii) synergies are one-sided (i.e. one party benefits but the other does not). Which governance mode would you recommend?
Q3. Your company is looking to diversify into a new business. You have short-listed a partner who can provide you with the key resource you need to operate in the new business. Your trusted advisor tells you that this resource is easily substitutable. On this criteria alone (keeping everything else constant), what should you go for?
Q4. “If you want to diversify, buying a well-performing company is always a good bet.”
Q5. In 2017, a merger was announced between Essilor (a French producer of lenses) and Luxottica (an Italian producer of frames for glasses). Below are some statements from the joint press release (https://www.essilor.com/en/medias/press-releases/essilor-delfin-create-global-integrated-player-eyewear-industry-combination-essilor-luxottica/).
Assuming all statements are true, which statement is most convincing as a justification for this merger?
Q46. You run a software business. One of your competitors enters a food delivery business through a non-equity alliance with HappyEat. Which statement about this diversification move is most plausible?
Q1. Step 1 “Finding synergies”
In a conference call with financial analysts, Satya Nadella, CEO Microsoft, said: “Great, and so let me now sort of take you through a couple of illustrations to bring this home. I want to start, in fact, with talking about more of the usage of Office 365 and LinkedIn and how that will get lit up and really help drive engagement on both sides. Take the most obvious one, which is the profile. LinkedIn essentially becomes the social fabric across all of Microsoft, whether it’s in Outlook, in Excel, or Skype, or PowerPoint, or Word, or SharePoint. Now you have the ability whenever you’re looking up a contact not only to see that contact with the information that’s contained in Active Directory, but you can get at the full richness of their information in the professional network. And who are all the others in their professional network. So that’s sort of what we mean by the social fabric of your digital work and Office 365.” (Microsoft and LinkedIn Conference Call, Monday, June 13, 2016, https://www.microsoft.com/en-us/Investor/events/FY-2016/microsoft-linkedIn.aspx?EventID=173714)
The above explanation of Satya Nadella, CEO Microsoft, is a justification for the acquisition on the basis that:
Q2. Step 2 “Identifying resource gaps” and Step 3 “Identifying candidates”
Read the press release, see the reading “Microsoft – LinkedIn (press release)”.
What is the key resource for which Microsoft acquired LinkedIn?
Q3. Step 4 “Ally or acquire”
Discussing slide 11 “Connecting the professional world” of the investor presentation, see the reading “Microsoft – LinkedIn (investor presentation)”, Satya Nadella, CEO Microsoft, and Jeff Weiner, CEO LinkedIn, said the following:
“[Satya Nadella:] Now besides the numbers, though, what’s underneath that is this rich information graph. What we have at Microsoft today is what we refer to as the Microsoft Graph, where people and their relationships, their calendars, their work artifacts, their projects, as well as what’s inside of business systems, whether it be leads and prospectives, all of that is connected as one information graph. And, of course, LinkedIn has a similar graph. It is about the professional network. It’s about you, your job history, your skills, the people you know in your profession. And if you connect these two graphs, that’s when the magic starts to happen in terms of how digital work gets completed. We really can transform the life of professionals in terms of completing it.
And let me just turn it over to Jeff to talk a little bit about some of the vision he has shared here.
[Jeff Weiner:] Yeah, so one of the things both Satya and I are most excited about is when you combine Microsoft’s corporate graph with LinkedIn’s professional graph. We think we’re going to be able to take a very substantial leap forward, in terms of the realization of our vision, which is creating economic opportunity for every member of the global workforce. And we’re going to do that through the development of the world’s first economic graph. That’s a digital mapping of the global economy. And for those of you a little less familiar with this it’s something at LinkedIn we’ve been talking about for several years now.
The economic graph envisions a profile on LinkedIn for every one of the 3 billion members of the global workforce, a digital representation for every company in the world, somewhere on the order of between 60 and 70 million companies, when you include small and medium sized businesses. A digital representation for every one of the job availabilities made possible by those companies, on the order of 20 million-plus. Digital reflection representation of every skill required to obtain those jobs, and through our Lynda acquisition the coursework to make that possible, a digital profile for every university or higher education organization, vocational training facility that enables people to acquire the skills they need to get the jobs offered by those companies. And then lastly, a publishing platform that facilitates the sharing of professionally relevant knowledge between individuals, companies, and universities to the extent they’re interested in doing so.” (Microsoft and LinkedIn Conference Call, Monday, June 13, 2016, https://www.microsoft.com/en-us/Investor/events/FY-2016/microsoft-linkedIn.aspx?EventID=173714)
Microsoft chose an acquisition over an alliance. Below are some potential reasons. Which of these is a plausible reason for Microsoft’s choice?
Q4. Step 5 “Organic or inorganic growth”
Microsoft chose inorganic over organic growth. Below are some potential reasons. Which of these is the least plausible reason for Microsoft’s choice?
Q1. One difference between a sell-off, spin-off, and equity carve out is the owners of the divested business. Which statement about these owners is correct?
Q2. Gamma analyzed all its businesses and concluded they will divest none of them. Which statement can we infer?
Q3. Alpha divests one of its businesses to Beta. Which statement can we infer?
Q4. In 2015 eBay spun-off PayPal. As one justification for this spin-off, the board stated (https://www.ebayinc.com/stories/news/ebay-paypal-become-independent-companies-2015/):
“The benefits of the existing relationships between eBay and PayPal will naturally decline over time and can be optimized in arm’s length operating agreements between the two entities. Arm’s length operating agreements can formalize the existing relationships between the two companies and capture ongoing synergies.”
This reason for the divestiture corresponds to
Q1. A family has 80% of the cash flow rights of firm A. Firm A has 50% of the cash flow rights of firm B. Firm B has 40% of the cash flow rights of firm C. A family has 80% of the voting rights of firm A. Firm A has 75% of the voting rights of firm B. Firm B has 60% of the voting rights of firm C.
What percentage of the cash flow rights of firm C does the family own?
Q2. A family has 80% of the cash flow rights of firm A. Firm A has 50% of the cash flow rights of firm B. Firm B has 40% of the cash flow rights of firm C. A family has 80% of the voting rights of firm A. Firm A has 75% of the voting rights of firm B. Firm B has 60% of the voting rights of firm C.
What percentage of the voting rights of firm C does the family own?
Q3. A family has 80% of the cash flow rights of firm A. Firm A has 50% of the cash flow rights of firm B. Firm B has 40% of the cash flow rights of firm C. A family has 80% of the voting rights of firm A. Firm A has 75% of the voting rights of firm B. Firm B has 60% of the voting rights of firm C.
Let’s say you own 40% of the voting rights of firm C. You want to nominate someone to the board of firm C. Can the family block your nominee? Assume that a nominee requires a simple majority vote (i.e. more than 50%) to get accepted.
Q4. You are an external advisor to NewTech, which made investments in three startups and now has full control. They are active in flower delivery, music composition, and website security. You are asked to advise on a new HQ influence model for its headquarters. After an initial analysis, you conclude that a) the businesses are fairly unrelated and synergies between them are limited, b) each business requires substantial funding to achieve growth, and c) unlike the NewTech management team, the management teams of the business are inexperienced.
Which HQ influence model would you advise to NewTech?
Q5. Your friend complains about his company: “I have mixed feelings about my company. On the negative side, decision making is slow. I spend most of my time writing reports and conducting extensive analyses. I wish I could spend more time on implementing decisions. On the positive side, I’m proud of the many, high-quality businesses we are in. I am in TV production, but my company also does theatres, books, and music. And perhaps the best thing is that I get to work with all these wonderful people from the different businesses.”
This company has most likely which HQ influence model?
Q1. Which business contributes to corporate advantage? Recall that corporate advantage is when joint ownership of businesses is worth more than separate ownership. (Multiple answers possible)
Q2. You are responsible for resource allocation at the headquarters of Fruit4Every1. Each business has requested 20 for next year. Your budget is only 40. Without knowing the returns to your investments for each business, which 2 of the below businesses would you be most inclined to allocate the requested 20?
Q3. You are responsible for resource allocation at the headquarters of Fruit4Every1. Your CEO is worried about the company’s future growth potential. She has provided you additional funds of 30. Without knowing the returns to your investments for each business, which 2 of the below businesses would you be most keen to fund?
Q4. In the past, some businesses have complained that resource allocations were unfair. Without knowing past resource allocations, which business is most likely to perceive allocations as unfair?
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