George Keller of the California Oil Company (Socal) to determine his

Gulf Oil Company – acquisition


How much would you like to bid for Gulf Oil. Gulf will not consider a bid of less than $ 70 per share, even if its final closing price of $ 43 per share.

o Between 1978 and 1982, the Gulf doubled its exploration and development costs to increase oil reserves. In 1983, as Gulf management repurchased more than 30 million shares of its 195 million shares, the Gulf began drastically reducing exploration spending.

o Gulf Oil's acquisition is due to the recent acquisition of Boone Pickens, Jr Mesa Oil Company. He and a group of investors spent $ 638 million and received about 9% of all Gulf shares. Pickens conducted a proxy fight to control the company, but Gulf executives broke Boone's takeover as he followed up a bid for a bid of $ 65 per share. The Gulf then decided to liquidate itself and contacted several companies to participate in the sale

o The opportunity to improve was Keller's main attraction to the Gulf, and now he had to decide on the Gulf if the liquidation was worth it


o What is the value per share of Gulf Oil if the company is liquidated?

o Who is Socal

o What should be levied on Gulf oil?

o What can be done to prevent Socal from using Gulf Oil as a going concern?


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

o Currently holds 13.2% of the Gulf Group stock with an average purchase price of $ 43

o Lending $ 300 million against Mesa Securities and Raised $ 65 / share to 13.5 million shares, which would increase Mesa's stake to 21.3%.

o Under re-registration, they had to borrow many times the value of Mesa to get the large seats needed to occupy the board

o Mesa is unlikely to raise so much capital.


o The issue price may be less than $ 75 per share.

 The issue price may be less than $ 75 per share, if any, 

o Socal's debt is only 14% of the total capital (Figure 3), the bank is willing to borrow enough

Kohlberg Kravis:

o Specialized in leveraged buyouts. Keller believes their bids are beaten because the core of their offer lies in preserving the bay's name, assets and work. The Gulf will essentially be a continuing operation until a long-term solution is found

Socal's proposal will be based on how much the value of the Gulf Reserve has not further explored.

Gulf Oil Weighted Average Cost of Capital

o The Bay's WACC was determined to be 13.75% using the following assumptions:

o CAPM used to calculate equity costs using β for 1.5 , The risk-free rate is 10% (1-year T-bond), and the market risk premium is 7% (Ibbotson Associates 1926-1995 arithmetic average data). Equity cost: 18.05%

o The market capitalization of shares is determined by multiplying the number of issued shares by the share price of $ 30 in 1982. This price is used because it is the unexpanded value before the price is taken over by trying to push it higher. The market value of the stock: $ 4,959 million, weight: 68%

o The debt value is determined by using the book value of $ 2,291 in long-term debt. O Tax rate: 67% of net income before tax divided by income tax expense

] Gulf of the Gulf (19459003)

The value of the Gulf consists of two components: the value of the Gulf oil reserve and the value of the firm as a going concern [19​​459002]

o Estimated future oil production in 1983, until all reserves are depleted

(Exhibit 2). Production was 2.9 million barrels in 1983, presumably unchanged until the remaining 283 million barrels of production in 1991

o The cost of production remained constant relative to production, including the production unit currently used by the Gulf

o Because the Gulf uses the LIFO method to calculate inventory, assuming that the new reserve expends in the same year it was discovered, all other exploration costs, including the cost of land use, will be the same

o Oil prices are expected to increase in the coming decade due to the fact that there will be no further exploration in the future

o Oil prices are expected to increase in the coming decade

o Income minus expenses to determine the cash flow for 1984-1991. After all liquidation of oil and gas reserves, cash flow ceased in 1991. The cash flows generated involve only the liquidation of oil and gas assets and are not included in the liquidation of other assets, such as liquid assets or net assets. The capital cost of the Gulf is then used as the discount rate to discount the cash flow at the present net present value. The total cash flow until the end of the liquidation period is discounted to $ 998.1 million at the Gulf's 13.75% discount rate (WACC).

The value of the Gulf as a going concern [19​​459002]

o The second component of the value of the Gulf is its value as a going concern [19​​459002]

o is related to the valuation because under the liquidation plan , Socal does not plan to sell any Gulf assets, not its oil. On the contrary, Socal will use the Gulf's other assets

o Socal can choose to resume the Gulf at any time during the liquidation process, and all that is needed is for the Gulf to begin the exploration process again.

o The value of continuing operations is calculated by multiplying the number of shares outstanding by the price of $ 30 in 1982. Value: $ 4.959 billion.


o When the two companies were merged, the stock price was chosen because it was the value assigned by the market before the price was taken over by the attempt

The company's over-payment buy-in convention is

o Shareholders 'earnings from excess transactions and shareholders' loss value for the purchasing company.

o Socal has the responsibility to their shareholders, not the shareholders of Gulf Oil

o Socal has determined Gulf Oil's value in liquidation is $ 90.39 per share.

o The maximum bid amount per share is determined based on the value per share of SACC's WACC (16.20%). The result is a price of $ 85.72 per share.

1. Socal's WACC is 16.2%, much closer to the price Socal expects to pay to shareholders

o The minimum bid is usually based on the current price of the stock Of the price, which will be 43 US dollars per share.

1. However, Gulf Oil will not accept a bid of less than $ 70 per share.

2. In addition, competitors are willing to bid at least $ 75 per share in order to raise the bid price

o Socal has obtained the average of the highest and lowest bid prices, resulting in a bid price of $ 80 per share.

If Socal acquires the Gulf for $ 80, it is based on the company's liquidation value, not a going concern. Therefore, if Socal operates Gulf as a going concern, its stock will depreciate about half. Social shareholders worry that management may buy the Gulf and control the company, because only the current stock price of 30 dollars.

o After the acquisition, there will be substantial interest payments that may force management to improve performance and operational efficiency. The use of debt in acquisitions not only serves as a financing technique, but also as a tool for the desire to force change in management behavior.

o Socal may employ several strategies to ensure proper value to the shareholders and other interested parties in taking over and using the bays

o Contracts may be executed on or before the tender. It will define the future obligations of social management and include its liquidation strategy and projected cash flows. While management may comply with the Convention, there is no real incentive to prevent them from implementing their own agenda.

o Management can be supervised by the executive;

o Another way to ensure that the interests of the shareholders are more shareholder-like, especially if the supervision is too expensive or too difficult The benefits approach is very expensive and ineffective. For example, an increasingly common solution to the difficulties of separation of ownership and management of listed companies is the partial payment of share and share options to corporate executives. This gives the manager a strong incentive to act in the interests of the owner by maximizing shareholder value. This is not a perfect solution because some managers with a lot of stock options are involved in accounting fraud to increase the value of these options long enough to make them cash a bit but detrimental to their companies and other shareholders.

o For Socal, it is most advantageous and cheap to align management concerns with shareholders' concerns by paying stock and stock options to shareholders.

o Socal will bid to Gulf Oil because its cash flow shows that

o Socal will bid $ 80 per share but limit Further bid capped at $ 85.72, as paying higher prices would hurt Socal's shareholders