Gulf Oil case study

The Standard Oil Company of California(Socal) is trying to determine how much to bid on the Gulf Oil Corporation. George Keller, the CEO of Socal, would need to borrow 14 billion dollars in order to make a substantial bid. While banks are willing to lend the money because of Socal's low to debt ratio, the loan would put the company in a highly leveraged position. In order to alleviate that debt, some of Gulf's assets could be sold. Keller has to consider the value of Gulf's exploration and development program when calculating future returns. Two billion dollars were being spent on the exploration and development program. This money could instead be used to reduce the debt if Socal acquired the company. However, the exploration program holds a lot of potential future value, because of its goal of new oil discovery. The discovery of future oil might not be necessary because of the substantial amount of oil Gulf already has on reserve.
Gulf's Value
When putting the company up for the auction, Gulf established a minimum bid level of $70 per share. This $30 more than the the trading range Gulf was in a few months ago. Gulf can charge a high premium because it is worth a lot more than 40 dollars per share to potential buyers. A company 登verpayingfor an acquisition is not uncommon. The market value of 40 dollars does represent the actual value it has to the bidders. Part of the additional value comes from the ability to control the company. In addition, once a company gains control of Gulf there is a potential synergy that is created by the combination of assets. The acquisition of Gulf by Socal would produce a combination of two oil companies. The combination of assets could lead to a future return greater than the sum of their two parts.
Forced Liquidation
Boone Pickens ,of Mesa Company, tried to push Gulf into a sale of its company. He did this by continually purchasing large amounts of shares of the company. James Lee the current chairman of Gulf, felt