Day 111 in MIT Sloan Fellows Class 2023, M&A and PE 3 "Evaluate offers and make a decision"
Anadarko case
We studied how to evaluate different offers from multiple buyers as a shareholder/board member of target companies. Today's case is Anadarko, the middle size oil exploration company.
After 2015, the middle or small size oil companies struggle with the decline of oil pricing and extremely high CapEx, whereas oil majors such as Exxon or Chevron are keen to buy these companies because of relatively reasonable price.
Discussion on the table
So, Chevron firstly had a conversation with Anadarko and was about to make a deal. The contract contains termination fees, which are sometimes used for increasing buying prices from others, but mainly for alerting targeting companies not to explore others' offers. Also, it depends on the fee(typically 3% of the deal), but the target company possibly goes to a different offer and leverages fiduciary out.
Then, OXY came to the discussion. It gave Anadarko a much higher price offer. However, there were some concerns about this offer. OXY was relatively minor than Chevron, so the share price after the acquisition would be uncertain. It might go down drastically and quickly. Also, OXY needed to issue additional equities to exchange enough value of shares with Anadarko. This obligation required unrealistic approvals from OXY's share holders and made the possibility of this deal execution more uncertain.
So, what Anadarko needed to think about, and what kind of options were available for it?
Decision criteria
There are several considerations.
- Offering price
- Cash vs. Share exchange
- Legal obligation, including violation fee
- Required shareholder's approval
- Share price fluctuation after the announcement
- PMI
What Anadarko can do is to negotiate with OXY to increase cash proposition against share exchange because share exchange contains more uncertainty in terms of share price of OXY and share holders' approval.
No drawback to receive cash? NO. There are some drawbacks such as tax and share price after acquisition. So it would worsen the value by exchanging shares.
The ultimate way is to sign with Chevron and still accept OXY's offer.
Actually, this is what Adamarko did in this case.
