Financial Analysis on an Oil Corporation Takeover

GULF Oil Corp. - TakeoverSummary of • George Keller of Standard Pétrolière facts of Company of California (Socal) tries to determine how much he wants to offer on GULF Oil Corporation. The Gulf will not consider offers below $70 per share though their last closing price of fence by share was estimated at $43. The • between 1978 and 1982, Golfe doubled its expenditure of exploration and development to increase their oil reservations. In 1983, the Gulf started to reduce expenditure of exploration considerably due to the prices of oil in fall while the management of Gulf repurchased 30 million their 195 million outstanding shares. The • the change of oil of Gulf was due to a recent attempt at change by Boone Pickens, Jr. of Mesa Petroleum Company. He and a group of investors had spent $638 million and had obtained around 9% of all the outstanding shares of Gulf. Pickens engaged in a combat of procuration for the order of the company but the executives of Gulf fought the change ! of Boone while it continued with an offer of partial partial tender to $65 per share. The Gulf decided then to liquidate in its own conditions and contacted several companies to take part in this sale. The • the occasion for the improvement was the principal attraction of Keller to the Gulf and now it must decide if the Gulf, if liquidated, is worth sorrow $70 per share and how much it will offer on the company. • Of problems what is oil value of Gulf by share if the company is liquidated? The • which is are the competition of Socal and how them a threat? The • what would owe Socal offered on the oil of Gulf? • What can be made to prevent Socal of the oil of operation of Gulf like active concern? The principal competitors of competition to obtain the oil of Gulf include the oil of MESA, Kohlberg Kravis, oil of ARCO, and, naturally, of Socal.Mesa: The • currently holds 13.2% of the actions of the Gulf at a purchase price of average purchase of $43. The • borrowed $300 millio! n against values of MESA, and made a proposal of $65/share for! 13.5 mi llion shares, which would increase the possessions of the MESA with 21.3%. • Under the reincorporation, they should borrow a quantity much once the value of the net amount of the MESA to gain the necessary majority to gain a seat on the council. It is not very likely to increase MESA of • that much capital. Without worrying, Boone Pickens and its group of investors will make a substantial benefit if they sell their current shares with gaining bidding.ARCO: The bid price of • is probable less than $75/share since an offer of $75 will send its proportion of rising debt, of this fact making it difficult to borrow anything more. The debt of Socal of • is only 14% (exposed object 3) of total capital, and the banks are laid out to lend enough to return offers in the $90 possible ones. Kohlberg Kravis: The • specializes in powerful repurchases. Keller feels that is to them the offer to be beaten since the heart of their offer is located in the conservation of the name, capitals and! labours of the Gulf. The Gulf will be primarily a concern going until a longer-term solution can be found. The offer of Socal will be based on how much Gulf the reservations are worth the sorrow without more exploration. Other assets and responsibilities for the Gulf will be absorbed in the assessment of Socal. The cost Weigh-Means of the oil of Gulf the WACC of the Gulf of • of capital was given to be 13.75% by using the following claims: O CAPM calculated the cost of stockholders' equity by using beta of 1.5, risk-free rate of 10% (1 year T-sticks), allowance for risk of the market of data of 7% (arithmetic Ibbotson Associates des' of mean of 1926 - 1995). Cost of stockholders' equity: the commercial value of 18.05%. O of the stockholders' equity was given by multiplying the number of outstanding shares by the exchange stocks 1982 of $30. This price was employed because it is the a-inflated value before the price was led upwards by the attempts at change. Commercial valu! e of the stockholders' equity: $4.959 million, weight: the val! ue of 68 %. O of the debt was given by employing the book value of the long-term debt, $2.291. Weight: cost of 32%. O of debt: tax tax rate of 13.5% O (given): 67% calculated by the income Net before the taxes divided by expenditure of income tax. The evaluation of the value of the oil Gulf of Gulf is made up of two components: the value of the reservations of the oil of the Gulf and the value of the company like active concern. The projection of • A was made go ahead since 1983 estimating the production of oil until all the reservations have ét � épuisées (objet exposé 2). La production en 1983 était 290 millions de barils composés, et on a assumé que ceci est constante jusqu'en 1991 où 283 millions de barils restants sont produits. Des coûts de production de • ont été jugés constants relativement à la quantité de production, y compris la dépréciation due à la méthode d'unité-de-production actuellement employée par le • de Gulf (la production sera identique, ainsi la quantité! de dépréciation sera identique) puisque le Golfe emploie la méthode de LIFO pour expliquer l'inventaire, il est supposés que les nouvelles réservations sont expensed la même année qu'elles sont découvertes et tous autres coûts exploratoires, y compris géologique et des coûts géophysiques sont chargés contre le revenu comme encouru. Le • puisqu'il n'y aura plus d'exploration allant en avant, les seules dépenses qui seront considérées sont les coûts impliqués de la production pour épuiser les réservations. On ne s'est pas attendu à ce que le • le prix d'huile monte en dix années à venir, et puisque l'inflation affecte le prix de vente d'huile et le coût de production, il se décommande dehors et W as negated in the cash flow analysis.• Revenues minus expenses determined the cash flows for years 1984-1991. The cash flows cease in 1991 after all oil and gas reserves are liquidated. The cash flows derived account for the liquidation of the oil and gas assets only, and do not acc! ount for liquidating other assets such as current assets or ne! t proper ties. The cash flows were then discounted by net present value using Gulf's cost of capital as the discount rate. Total cash flows until liquidation is complete, discounted by Gulf's 13.75% discount rate (WACC), come to $9,981 million.Gulf's value as a going concern • The second component of Gulf's value is its value as a going concern. • Relevant to the valuation because Socal does not plan to sell any of Gulf's assets other than its oil under the liquidation plan. Instead, Socal will utilize Gulf's other assets. • Socal can choose to turn Gulf back into a going concern at any time during the liquidation process, all that is needed is for Gulf to start exploration process again. • Value as a going concern was calculated by multiplying the number of shares outstanding by the 1982 share price of $30. Value: $4,959 million.o 1982 share price chosen because this is the value the market assigned before the price was driven up by the takeover attempts.Bidding Strategy • When! two companies merge it is common practice for the purchasing company to overpay for the purchased firm. • Results in the shareholders of the purchased company profiting from the over-payment, and the shareholders of the purchasing company losing value. • Socal's responsibility is to their shareholders, not the shareholders of Gulf Oil. • Socal has determined the value of Gulf oil, in liquidation, to be $90.39 per share. To pay anything over this amount would result in a loss for Socal shareholders. • Maximum bid amount per share was determined by finding the value per share with Socal's WACC, 16.20%. The resulting price was $85.72 per share.1. This is the price per share that Socal must not exceed to still obtain profit from the merger, because Socal's WACC of 16.2% is closer to what Socal will expect to pay their shareholders. • The minimum bid is usually determined by the price the stock is currently selling at, which would be $43 per share.1. However, Gulf Oil will! not accept a bid lower than $70 per share.2. Also, the additi! on of th e competitor's willingness to bid at least $75 per share drives the winning bid price up. • Socal took the average of the maximum and minimum bid prices, resulting in a bid price of $80 per share.Maintaining Socal's Value • If Socal purchases Gulf at $80 it is based on the company's liquidation value and not as a going concern. Therefore, if Socal operates Gulf as a going concern their stock will be devalued by approximately half. Socal stockholder's fear that management might takeover Gulf and control the company as is which is only valued at its current stock price of $30.• After the acquisition, there will be large interest payments that could force management to improve performance and operating efficiency. The use of debt in takeovers serves not only as a financing technique but as a tool to hopefully force changes in managerial behavior.• There are a few strategies Socal could employ to ensure stockholders and other relevant parties that Socal will takeover and use G! ulf at the appropriate value.o A covenant could be executed on or before the time of the bid. It would specify the future obligations of Socal management and include their liquidation strategy and projected cash flows. Although management might respect the covenant, there is no real motivation to prevent them from implementing their own agenda.o Management could be monitored by an executive; however, this is often costly and an ineffective process.o Another way to ensure shareholders, especially when monitoring is too expensive or too difficult, is to make the interests of the management more like those of the stockholders. For instance, an increasingly common solution towards the difficulties arising from the separation of ownership and management of public companies is to pay managers partly with shares and share options in the company. This gives the managers a powerful incentive to act in the interests of the owners by maximizing shareholder value. This is not a perfect! solution because some managers with lots of share options hav! e engage d in accounting fraud in order to increase the value of those options long enough for them to cash some of them in, but to the detriment of their firm and its other shareholders.• It would probably be the most beneficial and the least costly for Socal to align its managers concerns with that of the stockholders by paying their managers partly with shares and share options. There are risks associated with this strategy but it will definitely be an incentive for management to liquidate Gulf Oil.Recommendation • Socal will place a bid for Gulf Oil because its cash flows reveal that it is worth $90.39 in a liquidated state. • Socal will bid $80 per share but limits further bidding to a ceiling of $85.72 because paying a higher price would hurt Socal's shareholders.Colleen May recently moved to Chicago, Il from New Orleans, LA. She graduated from Arizona State University with a double major in Finance and Marketing. She is extremely self motivated, a dedicated team player and a! lways searching for new challenges. Colleen is currently seeking an advertising/marketing career in the Chicago area.Article Source: http://EzineArticles.com/?expert=Colleen_May
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