Gulf Oil Case

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Business 352

Gulf Oil Company

Sarah Barrette, Trevor Haug, Tyler Crawley, Maxwell Steimle

Group #1

10/31/12

Table of Contents
Recent HistoryPage 3
The TakeoverPages 3-4
The AuctionPage 5
Financial AnalysisPage 5-6
Standard Oil Company of California’s AlternativesPage 6
RecommendationsPage 7
Works CitedPage 8

Appendix
Balance Sheet (Table 1)Appendix 1
Operating Sheet (Table 2)Appendix 2
Financial Analysis (Table 3)Appendix 3
Give appropriate names and add additional appendix info

Take space out
Recent History. Gulf Oil Corporation lost an immense amount of their oil supply due to a large portion of the oil reserves being cut from Kuwait and Venezuela in 1975. James Lee became Chairman of Gulf Oil Corporation as the market reserves for oil were at an all-time low in 1981. Mr. Lee had two progressive ideas to help Gulf Oil escape their misfortunes. First, was to focus the company on oil, leaving behind energy developments of coal mining, uranium mining, and synthetic fuel. Second, was “discoveries and acquisitions” to help replace their own domestic reserves. One of the main acquisitions that Gulf Oil Corporation focused on was Cities Service. Efforts to acquire Cities Service were short-lived due to objections raised by the Federal Trade Commission. Due to a drop in the price of oil in the beginning of 1982 and continuing through 1984, Mr. Lee decided to reduce his exploration expenditures. Since Gulf Oil Corporation had a sizable cash flow, they also decided to repurchase 30 million of their 195 million shares outstanding. The Takeover. In 1982, Mesa Petroleum Company attempted takeovers on both Cities Services and General American Oil of Texas. Although both takeover attempts proved to be unsuccessful, Mesa sold back Cities Service’s stock for a gain of $31.5 million, and Mesa sold back General American Oil of Texas stock for a gain of $42.5 million plus an additional $15 million dollars for withdrawing their tender offer. With Mesa’s surplus of cash, Boone Pickens Jr., the CEO of Mesa Petroleum Company, and other experienced investors organized and were collectively known as the Gulf Investors’ Group. On August 11, 1983, the Gulf Investors’ Group offered a tender for shares of Gulf Oil Corporation at $39 per share. In a couple of months, the Gulf Investors’ Group had spent $638 million and held approximately 9% of Gulf’s outstanding shares with a value per share at about $43. Mesa still required at least $10 billion to obtain control of the company. This would be a challenging feat since their largest takeover, four years ago, had only cost $1 billion. As Mesa’s share in Gulf rose to 13.2%, Pickens stated his objective was to put himself on the board of directors in order to make changes in Gulf policy, beginning by placing domestic oil and gas properties in royalty trusts in order to collect high rates of return on the assets. In shock and outrage, Gulf Oil began reviewing their options to counteract the takeover. To combat the Pickens’ objective of putting himself on Gulf’s board of directors, Gulf Oil Corporation successfully lobbied for the board to re-incorporate Gulf from Pennsylvania to Delaware. The reincorporation required Pickens to have a majority vote of shareholders in order to elect alternative directors. On February 22, 1984, Mesa offered a partial tender at $65 per share, which was the estimated price the shares would be worth if placed in a royalty trust. This $65 was a significantly high premium with the prior day’s closing price equaling $52 5/8. In order to afford to purchase the shares, Mesa borrowed $300 million from Penn Central Corporation with securities as collateral. With this credit extension, Mesa was able to afford 13.5 million shares to acquire 21.3% of Gulf. With this increasing trend of acquisition of Gulf, Mesa expected other creditors would lend additional funds due to the takeover’s publicity. Gulf Oil Corporation...
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