Value the economic benefits associated with a decision to eliminate the exploration and development activities of the Gulf Oil Corporation. A key question is how Socal can justify a huge premium over market value to acquire Gulf.
A key objective is to understand the shareholder value implications of a corporate strategy built around investing huge amounts of capital in activities that promise largely negative net present values. Place a specific value on Gulf’s strategy of spending $2.2 billion per year to replace its reserves.
1. Evaluate the economics of Gulf’s exploration and development program in net present value terms. How do Gulf’s outlays for exploration and development compare to the cash returns Gulf generates from these activities? 2. When Gulf was placed on the auction block, a minimum bid level was established at $70.00 per share. Yet, only a few months before, Gulf was trading in the $40 range. How could Gulf become more valuable in such a short period of time? 3. How did Boone Pickens stampede Gulf into a sale? Even if the Pickens group were totally successful in their last tender offer, they would only control 21% of Gulf’s stock. Why did the Gulf Investors’ Group limit its total offer to 21% of the equity? Could they have afforded to buy more? Do you think reincorporation influenced the raiders’ strategy? Why? 4. If you were one of the prospective Gulf buyers called to Pittsburgh, how much would you bid to acquire the Gulf Oil Corporation? How does your knowledge of the motives and financial position of the other bidders influence your offer? How would the way in which you finance the takeover of Gulf influence the way you would run Gulf after the takeover?
You may wish to focus on
Analysis – Did Gulf’s exploration effort add to shareholder value?
What are the gains to Gulf shareholders from the takeover bid? How...