Acquisition Proposal: Berkshire Hathaway's Acquisition of Sony Corp

This project presents an acquisition proposal where Berkshire Hathaway Inc. is proposed to acquire Sony Corporation. The proposal explores the benefits for both companies, including diversification, market expansion, and synergy creation. The document includes a valuation analysis of Sony Corporation using intrinsic value, price-earnings ratio, and the Capital Asset Pricing Model (CAPM). The acquisition is justified by analyzing the benefits, the financial implications of the deal, and the increase in shareholder value. The analysis includes a comparison of the companies' financial metrics before and after the acquisition, and the impact on earnings per share. The proposal also discusses the regulatory and financial implications of a cross-border acquisition, the challenges, and potential reasons for failure. The assignment is a comprehensive analysis of a potential merger or acquisition, demonstrating an understanding of finance principles and strategic planning.

Acquistion Proposal
[Document subtitle]

Acquisition Proposal
Table of Contents
Part 1................................................................................................................................................2
Berkshire Hathaway Inc..................................................................................................................2
Sony Corporation.............................................................................................................................2
Benefits from Acquisition................................................................................................................3
Valuation of Sony............................................................................................................................6
Part 2 Personal Reflection...............................................................................................................9
References......................................................................................................................................13
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Acquisition Proposal
Part 1
The acquisition is one of the very common business activities where one company acquires or
purchase a majority of stake in another company in exchange for cash or kind. Purchasing more
than 50% of the stocks or assets of the other company will in achieving economies of scale,
diversify into new markets and increase the synergy along with a reduction in cost (Kenton,
2019). Cross border acquisition also enables the company to enter into the new markets. In this
talk we will propose an acquisition strategy through with Berkshire Hathaway Inc can acquire
Sony Corporation and explain the feasibility, justification of consideration and benefits that will
be derived by both the companies out of this proposal.
Berkshire Hathaway Inc.
Berkshire Hathaway is a multinational conglomerate company led by Warren E Buffet. It holds
controlling as well as economic interest in many national and international giants. The company
is headquartered in Omaha, Nebraska which started its business with a group of textiles milling
plants. The holdings of the company are massive that its main business has become acquiring an
interest in other companies and gaining value from the sound performance of those companies
(Hargrave, 2020). Some of the most popular companies owned are GEICO and Fruits and
Looms. The company also holds some economic interest in giants like Apple, Bank of America,
Coca Cola and Wells Fargo. The company’s key goals are to acquire economically sound
companies that have a sustainable competitive advantage. The companies acquired makes
Berkshire Hathaway’s presence in multiple industries which makes its portfolio a very well
diverse one (Alpert, 2020).
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Acquisition Proposal
Sony Corporation
Sony Corporation is another multinational conglomerate specializing in electronic equipment for
a wide range of domestic as well as commercial use. The company designs develop and
manufacture and markets the equipment and devices. The sales are made in almost every sector
and industry and the company has a leading position in the markets of many countries. Mobile
communications, Gaming, Image products and solution and entertainment are some of the
segments where the company has already marked its presence. It also into film and television
production, distribution. It also records sells and manages licensing requirement of music in
many countries. It has manufacturing units present in many Asian countries including Japan
apart from third-party contractors used by the company. It has many subsidiaries in the United
States. Thus, marketing is done mainly through sales subsidiaries across the globe (Reuters,
2020). In 2019 the company reported an annual turnover of JPY 87 million, EBITDA of JPY
12.68 million and Earnings per share of JPY 723. The company has also recently established a
$100 million COVID-19 relief fund (Sony , 2020). Sony has wide reach business in the USA
named as Sony Corporation of America. Headquartered in New York the principal business is of
electronics, interactive entertainment, pictures, music entertainment and Sony/ATV Music
Publishing company. The US division has a sale of approximately $78 billion for the fiscal year
ended March 31, 2019, and has approximately 114,400 employees (Sony, 2020).
Benefits from Acquisition
Currently, in the electronic segment, Berkshire Hathaway owns companies such as TTI, Mouser
and Sager electronics, etc. The company does not own any subsidiary that deals in consumer
electronics, entertainment and music sector like Sony (Worth, 2018). The acquisition of Sony
will enable Berkshire to set foot into the new industry through a highly reputed brand name. The
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Acquisition Proposal
company will have to make no efforts to improve the working of Sony. It will gain the benefit of
earning revenue through the well set platform. The international acquisition arrangement will
open more opportunities to expand for Sony (Japanese company) in the USA through being a
company of Berkshire Hathaway group.
According to the modern portfolio theory suggested by Harry Markowitz, the investor should be
able to maximize return through taking an optimum risk. It is possible to design such a portfolio
that does not advocate the theory of higher the risk, high are the returns. It includes the
application of the concepts of diversification of securities and class of assets and also
understanding the relationship between different classes of assets that a company owns in its
portfolio. The theory suggests that the company faces both systematic as well as unsystematic
risks. The systematic risk is the risk arising from market and industry condition and the
organization does not have much control over it. However, the organization has control over the
unsystematic risk as it is majorly related to how the internal matters of the company are being
managed (Mcclure, 2020). However, if the portfolio is poorly diversified it cannot prevent the
organization from systematic risk. Thus, Berkshire, if includes Sony in its portfolio the
systematic risk in the electronic segment of company’s holding, will be spread and it will add a
new company type thus making Berkshire Hathaway’s portfolio more diversified.
Capital Asset Pricing Model is a widely used formula in the finance field that is used to evaluate
the expected return on investment. CAPM model also accounts for the beta that represents the
possibilities of price fluctuation in a security and also market risk premium which is the extra
risk borne by the investor by investing in a particular security. The acquisition of Sony will be
justified only when the expected return is more than the weighted average cost of capital for
Berkshire Hathaway (ACCA Global, n.d.).
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Acquisition Proposal
Before deciding on to valuation of the company any mode of offer the company has to evaluate
various implications as the acquisition is a cross border deal which may have various monetary
and regulatory implications. Many incentives can be derived out of these transactions and the
trade relations between the two companies also impact the merger process. There are many
regulatory and taxation related norms applicable in the USA as well as Japan that have an impact
on the transaction. The viability of the proposal is also dependent on the implications. Thus,
regulatory approvals, political support, and other risk factors should be studied and their
implications should be evaluated.
Valuation of Sony
Now to enable the commencement of acquisition, we will draft an acquisition proposal that will
constitute the valuation of the company. There are various valuation methods used commonly in
trade but we need to choose an appropriate valuation method that justifies the price paid for the
acquisition and is also fair for both the parties.
Following is the intrinsic value of both the companies-
Berkshire Hathaway Sony Corporation
2019 2019
(in millions) (in millions)
(in $
million)
Total Equity $424,791.00
¥4,886,586.0
0 $44,975.48
Shares outstanding in
millions 1,625.00 1,295.00 1,295.00
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Acquisition Proposal
Equity Outstanding per
share $261,409.85 ¥3,773.43 $34.73
The above data is based on the annual reports of the company as on 31st December,2020. It
shows the intrinsic value per share of both the companies on that date. The Shareholder’s equity
is divided by the number of shares outstanding. For better comparison the data available in
Japanese on the data available in Japanese Yen of Sony corporation has been converted into
USD using the USD to JPY rate as in 31st December 2019.
However if we follow earning based approach of the performance the company as of today, then
Berkshire Hathaway’s intrinsic value would be $826,314 (GuruFocus, 2020) and Sony
Corporation’s intrinsic value would be $74.65 while the stock market price of the company is
only $60 (Guru Focus, 2020). Thus, the acquisition strategy of the company should be based on
the intrinsic value derived out of the free cash flows which shows that the shares of Sony
Corporation are undervaluing in the US.
We can apply the price earning ratio model to value the shares of Sony corporation by Berkshire
Hathaway Inc. This method will ensure that the valuation is done and the price offered takes into
account the current stock market price as well as earning potential of the company. Thus, the
income statement in the financial report and stock market price decided by the market both are
present in the valuation process. The current Price Earning Ratio of Berkshire Hathaway is 18.94
while that of 12.72. The earnings per share of Sony Corporation is ¥182.89 which is $ terms
amounts to $1.68. Thus, the maximum acceptable per-share value of Sony corporation would be
$1.68* 18.94, i.e., $31.881.
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Acquisition Proposal
The total number of shares that are currently outstanding in Sony Corporation is 1295 million.
Thus, to acquire Sony, Berkshire has to buy at least 51%, i.e., 660 million shares for which the
consideration to be paid would be $21,055 million.
Now we need to determine whether cash offer should be made by Berkshire Hathaway or a share
offer to acquire the target company.
Since the equity value as per the annual reports of the companies were $424791 million and
$44975 respectively. If the consideration is paid in cash to then the Berkshire’s value will be
increased to $448,711.48.
Now we will demonstrate the benefit of the merger to the shareholders of the acquiring company.
Before
Acquisition After Acquisition
Berkshire
Hathaway Sony Combined
Equity $424,791.00 $44,975.48
$469,766.4
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No of shares 1,625.00 1,625.00
Total assets $817,729.00
$208,352.9
3
Earnings attributable to
shareholders $49,828.00 $5,242.03 $55,070.03
EPS 30.66 33.88
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Acquisition Proposal
By acquiring Sony corporation, the profit-generating capacity of Berkshire will improve in real
terms and it will also increase the EPS of the shareholders as the profit generated by Sony will
increase Berkshire’s wealth by the percentage of holdings that the company has in Sony (51%).
The portion of earnings attributable to Berkshire Hathaway will ensure the company’s wealth
maximization. Also, the high performing assets and cash flow from sales will improve the cash
richness of Berkshire. However, if the full consideration is paid in cash and not in kind it will
have a major impact on the liquidity of the company. Thus, the cash offer will not dilute the
holding of the shareholders but it will have a major impact on liquidity of the company. The
liquidity crisis will however be recovered as their recovery of the lost surplus when the company
starts to get the cash flows from the acquired company.
Part 2 Personal Reflection
In the previous part of this task, we have analyzed and proposed a merger proposal between
Berkshire Hathaway and Sony Corporation. Both are multinational Conglomerates and they have
strong profitability and market capitalization. Apart from the financial aspects, the merger is a
profitable deal as the acquirer will get the chance to enter into consumer electronics,
entertainment and other segments which were untouched before. The proposal is a cash offer and
will improve the earning capacity of the acquiring company. However, in the process of merger
or an acquisition both the companies may have different valuation approaches which may lead to
conflicting opinions about the target company’s value and the expectations of the shareholders.
Also, in cross border transaction there is ongoing currency fluctuation which may lead to varying
results in the valuation.
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Acquisition Proposal
However, there are many factors which may lead to failure of this proposal and the deal might
not materialize despite being viable for both the parties. There can be several reasons for the
failure of a merger deals some of which can internal and some can be external causes which are
not in the hands of any of the organization. In some cases, there can be factors that might come
up which were not forecasted earlier by the company. There were many deals in the corporate
world which could not be materialized despite being well-drafted and has wide media coverage.
Common reasons for the failure of a merger can be the misleading value of an investment, poor
communication between the parties, cultural gap between the two parties, disagreement during
the negotiation that becomes a deadlock eventually, different strategies of the two businesses and
different corporate goals.
In this essay, we will study how a poor valuation can lead to the failing of the merger deal.
Valuation is the most integral part and essence of a merger. The target company will accept the
proposal only when the deals are profitable enough. A company which is already in profits and
had flourished in the global market like our target company in task 1, i.e., Sony there is a high
chance that the company will expect a premium price for the locking in the deal. Synergies are
the technical know-how that one company gains from others through a merger. It can be in the
form of research, abilities of the manpower and other intellectual properties that the target posses
and will benefit the acquirer. The valuation of these benefits and the premium paid by the
acquiring company may be different from what the target company is expecting. Sony has some
world-class technology for various products that it sells. Being a technical giant, the company
will expect a high premium price from the acquiring company. If the acquirer does not value the
target company’s synergies that it will derive as much as the target company does the merger
may fail. Thus, Berkshire should verify whether the proposed amount sufficiently justifies the
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Acquisition Proposal
technical know-how and synergies it will gain by the acquisition of Sony Corporation (Business
Matters, 2013).
The merger is a lengthy and time-consuming process. The market conditions may change and the
events happening in between when the merger is in pipeline might have a vital impact on the
numbers that are used in the merger. The decision of acquisition is taken looking at some
benefits and synergies that will benefit the acquiring company without putting in many efforts.
However, there can be some market condition that might change before the conclusion of a
merger and make it unviable. In this case, the valuation done becomes impractical and not
beneficial to one or both the parties. For example, the corona outbreak has hampered global
economy and it must have failed many of the merger proposals that were in pipeline. This can be
also possible in a positive way where the market conditions of the target company might improve
due to an event and the valuation of the company done by the acquirer may fall short of what it
will expect when the condition becomes favorable for the target company. In such cases a deal
can be saved only when the valuation is revised and the target company as well as acquiring
company is ready to seal the deal at the revised price.
At times when a statute requires consent of the shareholders before finalizing a merger, the
shareholders might have objection with the valuation or the mode of disbursement of such value.
When share offer is made by a company there can be objection among the shareholders as such
offer will dilute their control and voting power in the company. Also, the shareholders may not
agree to the value being paid and might be getting higher bidding from another party. In such
cases there can be a deadlock and merger may fail if the shareholders do not pass the required
resolution as they do not agree with the valuation and price that is offered. The stock price of the
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Acquisition Proposal
target company sees high fluctuations during a merger which may also result in opposing a
merger (Bloomenthal, 2020).
Valuation is considered as a key to implement a smooth and successful merger. If the valuation
is not done diligently and the acquisition deal gets locked it there are high chances that the
collaboration will fail in future. The valuation model used should be selected carefully and
results derived by applying different methods should be derived and compared with each other
before finalizing an offer price. The result gained by applying a method of valuation should be
compared and modified to give the effect of the non-monetary factors.
The value derived by the acquirer should be compared with other companies that belong to the
same industry as that of target company. Comparison method will enable the valuation team to
find out plus points of the company over its competitors and what it lacks. This will give realistic
figures which the target company will also expect on the basis of self-evaluation. When the
valuation models are complicated, communication is the key to gain the trust of shareholders and
management of the target company. The valuation proposal should be carefully drafted and must
include all the key aspects that may impact the important features that led to the value which is
being offered. The gain that will flow to the target company’s shareholders should be
demonstrated and over what period and in which form the benefits will be derived should also be
explained to the shareholders through the proposal of acquisition. Thus, if the target company’s
shareholders are satisfied with the future benefits and consideration of acquisition the valuation
will never result into the failure of merger deal.
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