Financial Analysis of a takeover Oil Corporation

Gulf Oil Corp .– takeover



o George Keller of the Standard Oil Company of California (Socal) It strives to how much you want to bid on Gulf Oil Corporation. Gulf will not consider bids below $ 70 per share, but the value per share after the last closing price of $ 43

o Gulf in 1978 and 1982, doubling its research and development expenses to increase oil reserves. In 1983, the Gulf began to cut research spending because of falling oil prices significantly Gulf Management repurchased 30 million shares to 195 million in circulation.

o takeover of Gulf Oil was due to the recent takeover attempt Boone Pickens Jr. Mesa Petroleum Company. He and a group of investors spent $ 638 million and gained about 9% of Gulf shares. Pickens engaged in a proxy battle for control of the company, but Boone Gulf leaders fought takeover, he followed a partial tender offer of $ 65 per share. Gulf, and then decided to overcome their own terms and to contact more companies to participate in this announcement.

o the fact that the improvement Keller main attraction of the Gulf and the Gulf now has to decide if liquidated, worth $ earnings per share, and how much they will bid for the company 70th


o What should capita Gulf Oil when the company?

o Who SoCal competition and how are they a threat?

o What should SoCal bid for Gulf Oil?

o What can be done to prevent the operation of SoCal Gulf Oil a going concern?


Major competitors include the acquisition of Gulf Oil Oil Mesa, Kohlberg Kravis, ARCO, and of course, Socal.

Mesa Oil

o currently holds 13.2% average purchase price of $ Gulf stocks 43rd

o borrowed $ 300 million against Mesa Secu rities and bid for $ 65 / share, 13.5 million shares, which would increase the portfolio of 21.3% Mesa. During

o recording again, he would often loan amount is net Mesa is to gain the required majority to gain a seat on the board.

o Mesa unlikely to raise that much capital. Regardless Boone Pickens and a group of investors will make a considerable profit when they sell the shares present the winner of the bidding.


o Offer price is likely less than $ 75 / share offer because the $ 75 to send the share of debt is soaring, making it difficult to borrow more.

o Socal debt of only 14% (Exhibit 3) total capital, and banks are willing to lend enough that it offers the potential $ 90th

Kohlberg Kravis

o specializes in leveraged buyout. Keller feels theirs is the bid to beat, because the heart of the offer is in the name of preserving the bay, assets and jobs. Gulf basically a continuation until a longer-term solution can be found. It will be based on

SoCal offer that is worth much without the Gulf's reserves to more exploration. Gulf SoCal absorbed into other assets and liabilities in the balance sheet.

WACC Gulf Oil

o Gulf WACC 13.75% determined by the following assumptions:

capital cost used to calculate p CAPM beta 1.5, risk-free rate of 10% (1-year T-bond) market risk premium of 7% (Ibbotson Associates data arithmetic average from 1926 to 1995). The cost of equity: 18.05%.

o the market value of equity is determined by multiplying the number of shares outstanding price of $ 1982 shares 30th This price is used because it is un-inflated value before the price driven up the acceptance trials. Capital market value: $ million 4959, weight: 68%.

o is belonging determines the carrying amount of the long-term debt, $ 2291st Weight: 32%.

o Debt: 13.5% (optionally)

o Tax rate: 67% Pre-tax Net divided calculated gains.

Gulf Oil Review

Gulf is the value of two components: the value of Gulf oil reserves and the value of the company as a going concern.

o the projection is made to go forward 1983 estimate the oil production until all reserves are depleted (Exhibit 2). The production of 290 million in 1983, a composite barrel, and this is assumed to be constant until 1991, when the remainder is produced 283 million barrels.

he kept the production costs constant relative to the quantity of production, including the bay due to the depreciation is currently used by the unit-of-production method (Production will be the same, so the amount of deterioration will be the same)

p As the Gulf use the LIFO method of taking inventory, it is assumed that the costs of new reserves in the same year, they discovered, and all other exploratory costs, geological and geophysical costs are charged to income included.

o as there will be more research going forward, the only expenses that take into account the cost of production of the reserves are exhausted.

o the price of oil is not expected to rise in the next ten years, and because inflation affects both the sale price and the production cost of oil, invalidate itself and negation of the cash flow analysis.

o revenues minus costs as determined by the cash flows for years 1984-1991. After the cash flows cease to exist in 1991, all oil and gas eradicated. The cash flow account is derived from the liquidation of oil and gas assets only and do not account for other illiquid assets, such as working capital or net properties. The cash flows are then discounted net present value of Gulf capital cost, as the discount rate. Total cash flows, discounted Gulf while 13.75% discount rate (WACC), completion of the liquidation comes to $ 9981 million.

Gulf value as the going of

o The second component is the value of the Gulf of doing business.

o Relevant evaluation because SoCal has no plans to sell any assets other than Gulf Oil in addition to the liquidation plan. Instead, it will use Gulf SoCal other devices.

o Socal can choose to turn back during the Gulf of doing business at any time during the liquidation process, all that is needed in the Gulf to start exploration process again.

o is like a continuously operating was calculated by the number of shares outstanding in the share price of $ 1982 30th Value: $ 4959 million.

o share price in 1982 was chosen because it is the value added driven up the price of the acceptance trials prior to the market.

Bid Strategy

o when two companies merge in the general practice of the purchasing company overpay for the purchased company.

o Results of the shareholders of the acquired company will benefit overpayment, as well as the shareholders of the purchasing company loses value.

o Socal task that shareholders or shareholders of Gulf Oil.

o SoCal determined the value of Gulf oil, winding up to $ 90.39 per share. You pay nothing for that amount would result in the loss of SoCal shareholders.

o Maximum bid amount per share is determined by finding the tickets per Socal wherein the WACC 16.20%. The price was $ 85.72 per share.

1. This price per share that may not exceed SoCal yet still gain a profit of association because SoCal WACC of 16.2% closer to what we expect SoCal to pay to shareholders.

o The minimum bid is usually determined by the price of the stock is currently selling for $ 43 per share.

1. However, Gulf Oil will not accept an offer less than $ 70 per share.

2. Also, in addition to the driver ready to offer at least $ 75 per share out the winning bid price.

o Socal took the average maximum and minimum bid prices, so the purchase price per $ 80 a share.

maintain SoCal's value

o Socal purchases Gulf at $ 80 is based on the liquidation value of the company and not the continuation of the business. Therefore, if you operate a going concern SoCal Gulf downgraded the stock is about half. SoCal shareholders fear that feed the bay and control the company, which assess the current share price is only $ 30 to management.

o After the acquisition will not have a large interest payments that driving force to improve performance and operational efficiency. The debt takeovers not only serves as a financing technique, but also a tool to hopefully force changes in driving behavior.

o There are a few strategies can apply SoCal to ensure that shareholders and other interested parties to SoCal Gulf will take and use the correct value.

o be out of the alliance, or before the time the offer. It enters the SoCal management and future obligations included in the liquidation strategy and expected cash flows. Although the leadership to respect the alliance, there is no real motivation, to prevent them from implementing their own agenda.

o Management could be followed by an executive; However, this is often costly and inefficient process.

o Another way to ensure that shareholders, especially when monitoring is too expensive or too difficult, is that the interests of management more than those of the shareholders. separation difficulties due to for example, is becoming more common ownership and control solutions for public companies pay executives partly shares and share options in the company. This gives managers a powerful incentive to act in order to maximize shareholder value by the shareholders. This is not a perfect solution, because some leaders participated in many stock options accounting fraud in order to increase the value of options is long enough to cash in some of them, but at the expense of the company and other shareholders.

o This is probably coordinate the concerns of leaders of the most useful and least expensive SoCal to the shareholders of the leaders in part paying shares and share options. There are risks with this strategy, but it's definitely an incentive leadership to liquidate Gulf Oil.


o SoCal placed a bid for Gulf Oil money flows turn out to be worth $ 90.39 a dismantled state.

o SoCal goodbye to $ 80 per share but restricts further bidding and ceiling of $ 85.72 because they pay higher prices would hurt shareholders SoCal.

Source by Colleen May

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