Berkshire and Lehmann Case Solution

Question 1. Evaluate the terms of the proposed $900 mm financing from the perspective of both parties. How would you calculate the return to investors in this transaction? If you need more information, what information do you need?

From Investor’s perspective (Berkshire Hathaway and Lehmann Brother’s Perspective)

• This investment was in continuance of Buffet’s plans of investing as much as $15 Billion in the energy sector

• Berkshire had already done business with Williams when it bought the Kern River Pipeline for $960 Million. Berkshire felt that Williams had its fundamentals in place i.e. solid assets, strong demands for its products and a reputation for customer service

• Despite William’s many difficulties, all the businesses of Williams continued to meet performance expectations. Between 2000 and 2001, their revenues increased by 1.4 billion.

• Berkshire had earlier directly invested in Williams. Thus they endorsed the William’s strategy and expected Williams to show solid economic performance in future.

• Market value for Equity of Williams was $13152 Million which was comparable to its competitors

• The loan was secured in the form of collateral in form of Barrett Resources Corporation which would make up for default in worst case scenario

From William’s perspective

• Berkshire and Lehmann were willing to provide a loan of 900 million dollars which would provide them temporary relief and would result in greater chance of Williams being able to secure a credit facility of $800 million

• Williams would be given a loan of $450 million each from Lehmann and Berkshire. This principal was to be repaid in 1 year.

In addition to this principal repayment, Williams was required to make a number of payments:

• Interest