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 Central Michigan UniversityBerkshire Hathaway Inc.Term ProjectAmanda Rivet, Lauren Kennedy, David Shoemaker, and Corey MaddoxBUS 100 Essential Business Skills 22362312Professor Jim ScottApril 15, 2019Table of Contents 1 Introduction ………………………… 2 2 Behind Berkshire Hathaway ……… 3-4 3 Management Styles ...……..………. 4-5 4Businesses and Investments ………... 5 5 Annual Revenues ………………….. 5-6 6 Expenses …….………………………. 6 7 Balance Sheet …………………..… 6-7 8 Income Trends …………………….. 7-8 9 Stocks …………….…………….….. 8-910Berkshire Hathaway Overview ….. 9-1011Final Investment ………………….... 10 12 Works Cited ………………………. 11-12Rivet, Kennedy, Shoemaker, & MaddoxProfessor Jim ScottBUS 10015 April 2019IntroductionThis purpose of the following paper is to analyze the business aspects of a multinational conglomerate company, named Berkshire Hathaway, and seeks to answer an underlying question: is this company worth the long-term investment of $100,000? This paper will discuss the location of Berkshire Hathaway, and implications for why their headquarters are located in a designated area. Berkshire Hathaway has invested into a multitude businesses, which will be named and discussed. The company’s chairman, Warren Buffett, will be discussed, specifically regarding his perfected management style, as well as his personal background and achievements as a businessman. More importantly, this paper will provide important details of Berkshire Hathaway’s past, and present, financial information. This information will include their current balance sheet, showing the assets, liabilities, and shareholders equity of the company, as well as stock price trends and their stock split. Additionally, this paper will examine ten years worth of trends in the company’s annual revenues, expenses, and gross profit, which are all interrelated components of their income statement. As a way to conceptualize all of the information provided, this paper will conclude with a decision of whether or not Berkshire Hathaway would be a profitable and successful long-term investment for potential buyers.2. Behind Berkshire HathawayBerkshire Hathaway was not always a holding company for a multitude of businesses and possesses quite a detailed history. The company was originally founded in 1839 as a textile manufacturing company by the name of Valley Falls Company, located in Valley Falls, Rhode Island. This company was under the ownership of Oliver Chace, a very successful, straight-faced entrepreneur of the 18th and 19th century. The Valley Falls Company eventually merged with a cotton manufacturing company named the Berkshire Cotton Manufacturing Company, which was established in 1889 in Adams, Massachusetts. Together, these companies formed the Berkshire Fine Spinning Associates in 1929, a textile mill that successfully survived the Great Depression. From this point, “Berkshire” has always remained part of the name of this company. Later in 1955, Berkshire Fine Spinning Associates merged with the Hathaway Manufacturing Company and grew to become the business unity, Berkshire Hathaway. In its first decades as a merged business that still remained within the textile industry, Berkshire Hathaway generated revenues as high as $1.2 billion dollars. Shortly after, these gains were met with turmoil: a dying textile industry, eventually leading to a high rate of layoffs and the closing of many plants (Chen).Roughly 32 years of age at the time, Warren Buffett bought into Berkshire Hathaway in 1962, slowly and gradually buying more of their stocks. Later, Buffett prematurely understood that Berkshire Hathaway would foresee financial troubles due to the declining textile industry. By 1965, Buffett decided to buy enough stock to take over the company rather than sell it, because he initially believed it to be a good investment. In order to mitigate the decline of the textile industry, the foundation of Berkshire Hathaway, Buffett began to expand the company into different ventures, starting with the insurance industry by the late 1960’s, officially turning Berkshire Hathaway into a conglomerate holding company. In short, Berkshire Hathaway has transformed from a specialized textile manufacturing company to a multibillion-dollar industry, all in respect to Warren Buffett (McFarlane).So, who is Warren Buffett, the man responsible for the current success and operations of Berkshire Hathaway? For starters, he is the renowned CEO of Berkshire Hathaway and is widely known as an investment guru and one of the most respected businessmen in the world, highly contradictory to the stereotype of all American businessmen being greedy or corrupt. Despite him being one of the richest men in the world, with an estimated net worth of $84 billion as of earlier this year, he has donated nearly $28 billion to charitable causes, earning him the respect of a generous philanthropist. He was born in August of 1930 in Omaha, Nebraska, and is 88 years old as of today. Intrigued by the field of business and investing as a young man, Buffett attended schools such as the University of Pennsylvania, the University of Nebraska, the Columbia Business School, and the New York Institute of Finance, which have all contributed to his expertise in stocks and investments ( Editors). According to The College Investor, Buffett’s focus on investment is rather simple: buy companies for a low price, improve these companies through management, and understand the long term improvements in stock price. He seeks companies that he can understand and favors simplicity overall and has experienced much success in identifying undervalued companies and becoming rich as a result (Farrington).3. Management StyleThroughout Berkshire Hathaway, managers have expressed that the freedom with which they are allowed to lead is unparalleled, and that they would never get the type of independence they have now with another company. It is surprising that Warren Buffet doesn’t intervene in many adverse decision which boost overall management morale. The only time that Warren Buffet only intervenes when Berkshire Hathaway reputation is on the line or major decline in sales. The Berkshire Hathaway company is built on the idea that managers will perform at a greater level if they are given complete autonomy from headquarters and allowed to run their businesses with a long-term perspective. Integrity is the forefront of the this business model and many CEO’s mimic this (Farrington).4. Businesses and Investments Most companies have various products that they sell to their customers. Although, Berkshire Hathaway does not run their business this way, which works out well for them. Instead of having products for consumers to purchase, Berkshire Hathaway invests stock in large, publicly traded companies (Berkshire Hathaway). Berkshire Hathaway is a multinational conglomerate holding company, which means that they own enough stock in these companies so that they are able to run management and the policies of these companies. Warren Buffett runs his company in a very unique way, so when he owns enough stock to run management in certain companies, so he is able to help them to make a profit. The companies that Berkshire Hathaway invests into include but are not limited to Apple, Bank of America, Coca-Cola, American Express, Southwest Airlines, and Delta Airlines (Berkshire Hathaway). If it were not for Warren Buffett, these companies would be run the same way they are today. Berkshire Hathaway owns over 50 subsidiaries, which in turn own 200 subsidiaries (Berkshire Hathaway). 5. Annual RevenuesOne of the many reasons that Berkshire Hathaway is such a successful company is because their revenues have been steadily increasing for the past ten years (Investopedia). Just last year in 2018, their annual revenues came to a total of $247 billion (Investopedia). Ten years ago, in 2009, their annual revenues came to a total of $112 billion (Investopedia). This means that their annual revenues increased by 112% in the past ten years (Investopedia). The average growth of revenue per year was 9.2%, which is an impressive incline. Although, from 2009-2010, their annual revenues increased a whopping 21%, which was their biggest increase in ten years (Investopedia). In 2009 their annual revenues totaled $114 billion, and in 2010 the revenues totaled $136 billion (Investopedia). 6. ExpensesWith a great increase in revenue, it was certain that there would be a substantial increase in its expenses as well. Just last year, the expenses of Berkshire Hathaway had reached up to $233 billion. This is considered a relatively high growth because, in 2009, the cost of expenses were just $95 billion. Between 2009 and 2018, the expense cost had increased by 144%, which is 21% above the annual raised revenue from 2009 to 2018. However, the period with the highest growth in expenses was during 2016 to 2017, with a $35 billion increase, a growth rate of 20%. Therefore, it can be reasoned that with a significant rise in revenue, for any successful company, will also lead to an increase in a company’s overall expenses (Yahoo Finance).7. Balance SheetThe balance sheet of a company consists of their total assets once the liabilities and shareholders equity have been added together. In the balance sheet of 2018, the liabilities of Berkshire Hathaway were estimated at $355 billion. In keeping the liabilities relatively low for a company of its stature, their amount in total assets is quite impressive. The shareholder equity represents a company's worth in the books, and according to Yahoo Finance, Berkshire Hathaway currently has a shareholder's equity listed at $352 billion. In 2018, the total assets of Berkshire Hathaway amounted to $707 billion. After calculating these numbers into the standard accounting equation (Assets = Liabilities + Owner’s Equity), making both sides of the equation equal (Yahoo Finance).8. Income TrendsThe net income of a company is defined as a company’s net profit or loss after all revenues, income items, and expenses have been accounted for. In relation to the revenue and profits of Berkshire Hathaway, it’s undeniable that they have not experienced a profit loss in over 10 years and have shown an overall consistent growth. Starting with the year of 2008, the annual income statement of the company reported $4.9 billion in profit. The following year, they reported an income of $8.05 billion, showing over a 60% increase in profit in comparison to 2008. The company experienced another 60% increase in annual income the year after that, reporting $12.9 billion as the annual income. Between 2010-2011, Berkshire Hathaway had a slight income decline, going from $12.9 billion down to $10.3 billion. This declined was recovered in 2012, when the income had increased by 45%, with $14.8 billion in total. From 2013 to 2014, there was little change, as both years reported roughly $19 billion as the annual income of that year. Similarly, 2015-2016 showed little difference in annual income growth, as both years reported roughly $24 billion, with the income of 2016 being slightly lower. In 2017 however, the annual income of the company jumped from $24.07 billion to $44.9 billion, an 87% increase in just one year. Oddly in 2018, which was the last annual income statement of Berkshire Hathaway as of today, the company reported just $4.02 billion as their annual income, a sharp decline from the previous year. This alarming decline in annual profits resulted from unruly factors, such as the significant decline of Apple which directly affects Berkshire Hathaway, according to Investopedia, and more so because of a new accounting rule that requires the company to report unrealized gains or losses in stock investments as net income, resulting in “truly wild swings” according to Warren Buffett. However, an upside to the steep decline of this company’s income is that they still did not experience any sort of profit loss because of these sudden changes and still stands as a multi-billion dollar company (Net Profit and Income, ).9. StocksWarren Buffett is known as a very successful investor by millions of people worldwide. He has spent years developing his own strategy and philosophy for investing. He is not a day trader by any means, rather, he is in it for the long haul. Buffett believes in long-term investments and taking ownership of successful companies. He is quoted saying, “In the short term, the market is a popularity contest; in the long term it is a weighing machine,” proving that he dislikes short term investing. His methodology and personal philosophy are evident in Berkshire Hathaway stock prices, history, and activity. Because of Berkshire Hathaway’s (BH) choice to follow Buffett’s methodology, they had to make a few major decisions when it came to the stock market. As the stock price grew and grew, Buffett recognized that not everyone was going to be able to invest in a company that was so expensive so BH offered another stock on the market. They now offered BRK-A and BRK-B which were being sold at much different price points. Both stocks are designed for different types of investors. BRK-A was shaped and carved to fit the needs of a large, long-term investor. The price is continuing to rise and there is no stock split in sight. What is a stock split? A stock split is almost exactly what it sounds like: where one share of stock splits into multiple. These splits usually happen at a rate of one to two or one to three. BRK-A would not ever undergo this because that would ruin the idea of having to invest for the long term. After a stock split, the price would be cut by normally two to three times less than it was and that leaves room for the price to rapidly increase right after the split. If the price drops, more people will buy in and most likely get out right after the price spikes again, therefore going against the long-term investment philosophy. BRK-B, as stated above, was not designed for the large investor, but rather intended to be affordable for the average investor. The BRK-B stock was growing healthily during the early 2000’s and was beginning to grow so large that the average investor was unable to buy any shares Because of this, Berkshire Hathaway and Buffett himself recognized that a change was necessary. The change that was decided upon, was that of a stock split – a division of already existing shares into multiple, usually occurring in rates of 2-for-1 or 3-for-1. Because of the rapid increase in price of the BRK-B stock, the stock went through a split at 50-for-1 bringing the price from above $3,000 to below $150. This made the shares much more affordable and made the market much more accessible for more people to gain ownership in a quality company, following Buffett’s philosophy. 10. Berkshire Hathaway Overview After reviewing the multiple aspects of Berkshire Hathaway, we are now able to make an informed decision whether or not it is profitable to invest $100,000 in this company. This paper examined the location of Berkshire Hathaway headquarters, Warren Buffett and his management style, and most importantly, the financial information. The financial information will allow us to make the decision whether or not someone should invest in Berkshire Hathaway. The current balance sheet and past ten years of income statement, which include revenues, expenses and profit, will determine their financial future.11. Final InvestmentAfter reviewing various aspects of Berkshire Hathaway, we will discuss the pros and cons of investing $100,000 into this company. First, we will examine the pros. Berkshire Hathaway has always been financially successful. Their revenues have always been steadily increasing, while their expenses follow up just enough so they are able to make a substantial profit (Investopedia). Also, Berkshire Hathaway is able to handle loss. For example, if one company that they own stock in does not do very well financially, they have over 50 more companies that they are able to rely on and pick up the slack. Now, we will examine the cons. Warren Buffett is now 88 years old, and he has been running this company for the bulk of its life. There is no guarantee that Berkshire Hathaway will remain as successful as it has throughout the years with a different chairman. Also, the stock price of BRK-A is extremely high compared to any other company to invest in. Therefore, if you were to buy BRK-A, you would most likely be a long term investor to spend that kind of money. After reviewing the pros and cons of an investment of $100,000 into Berkshire Hathaway, it has been concluded that it would be not only a good idea, but profitable in the long run to invest into this company. Works CitedAllen, Shawn. “Why Did Warren Buffett Buy Berkshire Hathaway in 1965?” InvestorsFriend, WordPress, 14 Jan. 2014, why-warren-buffett-bought-berkshire-hathaway/.BERKSHIRE HATHAWAY INC, .“Berkshire Hathaway Revenue 2006-2018 | BRK.B.” Macrotrends, Zacks Investment Research, Inc., stocks/charts/BRK.B/berkshire-hathaway/revenue.“Berkshire Hathaway Inc New Stock Split History.” Stock Split History, 21 Jan. 2010, berkshire-hathaway-inc-new/. "Berkshire Hathaway Inc. (BRK-A)." Yahoo Finance - Business Finance, Stock Market, Quotes, News, finance.quote/BRK-A/balance-sheet/. Editors. “Warren Buffett.” , A&E Networks Television, 10 Apr. 2019, people/warren-buffett-9230729.Carrig, David. “Warren Buffett Gave Away This Much of His Wealth in the Past 10 Years.” USA Today, Gannett Satellite Information Network, 11 July 2017, story/money/2017/07/11/warren-buffett-charitable-contributions-bill-melinda-gates-foundation/468837001/.Chen, James. "Berkshire Hathaway." Investopedia, 4 Oct. 2007, terms/b/Berkshire-hathaway.asp.Delventhal, Shoshanna. “How Apple's Decline Is Hurting Berkshire Hathaway.” Investopedia, Dotdash, 11 Dec. 2018, how-apple-s-decline-is-hurting-berkshire-hathaway-4580335. Farrington, Robert, et al. “The Top 10 Investors of All Time.” The College Investor, 2 May 2014, 972/the-top-10-investors-of-all-time/.“Forget Buffett the Investor. Follow Buffett the Manager." Fortune, 21 Apr. 2015, 2015/04/21/warren-buffett-the-manager/.Frankel, Matthew. “When Will Berkshire Hathaway Split Its Stock Again?” The Motley Fool, The Motley Fool, 14 Feb. 2017, investing/2017/02/14/when-will-berkshire-hathaway-split-its-stock-again.aspx. McFarlane, Greg. “How Warren Buffett Made Berkshire Hathaway.” Investopedia, Investopedia, 12 Mar. 2019, articles/markets/041714/how-warren-buffett-made-berkshire-hathaway-worldbeater.asp.The Value Portfolio. "Berkshire Hathaway: A Split Could Unlock Tremendous Value." Seeking Alpha, 7 2016, article/3980551-berkshire-hathaway-split-unlock-tremendous-value."Warren Buffett (@WarrenBuffett) on Twitter." Welcome to Twitter, warrenbuffett."Where is Omaha, NE?" WorldAtlas, 2pril Oct. 2015. ................
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