Amoco was actively cooperating and negotiating with BP on the merger issue. Based on Amoco’s stand-alone valuation, it was reasonable to estimate $47 million enterprise value and $41.5 million equity value, with a walking-away exchange ratio 0.54. Then adding synergy, it reached an opening exchange ratio 0.72. Through further negotiation with BP, both parties reached a conclusion on certain level synergy distribution and agreed to close the deal at an exchange ratio of 0.65. The merger of Amoco and BP had strategic significance. As Amoco, we are satisfied with this price, bringing Amoco shareholders $8.6 billion value through negotiation. 2. Stand-alone valuation of Amoco
When valuing the stand-alone value of Amoco, both WACC method (See Appendix 1) and multiples valuation (See Appendix 3) and are used to estimate the stock price. Eventually, two methods give us pretty much the same results.
From the balance sheet of Amoco, we can find out that it has a stable capital structure and accordingly WACC method is the best valuation approach. The firm value is estimated based on projected cash flows from 1999-2005, and after 2005 the free cash flows are assumed to grow at a constant rate and give us a present terminal value.
First, we need to get company’s WACC using the following formulas:
RD1-txDVL+REL(ELVL)
REL=Rf+ βE* (RM-Rf)
We use the market capitalization when calculating the D/V ratio and it turns out Amoco has an average D/V ratio of 12%. We use the 30-year treasury rate and corporate bonds rate on June 30, 1998 because we think some crisis affected the market in July and changed both rates significantly. With the tax rate of 35%, market premium of 7% and equity beta of 0.7, we come to the WACC of 10%.
Second we have to adjust the total net operating income to get the FCF (free cash flow).
FCF=Total Net Operating Income-∆Working Capital -Capex+Depreciation
Since capital expenditures will roughly