Case Study: Playing the Field: Competing Bids for Anadarko Petroleum

2. Estimate the value of synergies being claimed by CVX and OXY, respectively, from their proposed mergers with APC. Do OXYs synergy claims seem reasonable in relation to the synergies being claimed by CVX?

3. Compare the net gains to APC shareholders under: (a) The merger agreement announced with CVX on 4/11/2019 ($16.25 cash + 0.3869 CVX shares). (b) The offer announced by OXY on 4/24/2019 ($38 cash + 0.6094 OXY shares), assuming only 50% of the synergies forecast by OXY are realized. In each case, your analysis must clearly highlight the following: enterprise value of the combined entity; increase in net debt as a result of the merger; market value of equity of the combined entity; and the fractional ownership of legacy shareholders of APC and the acquiring firm in the combined firm. In case of the OXY offer, also describe how you accounted for the $1 billion break-up fee that APC agreed to in its merger agreement with CVX.

Apart from the information provided in the case, use the following additional assumptions/instructions :

Use the 20-year US treasury rate as the risk-free rate, and assume that the market risk premium is 5%.

All companies have a marginal tax rate of 25%.

Use the stock prices of the three companies on 4/11/2019 (Exhibit 8b) to compute their standalone values.

Use the debt balances from Exhibit 6, and assume that none of these companies have any excess cash.

The appropriate discount rate for computing the value of synergies is the unlevered E&P cost of capital (i.e., average ru of all E&P companies).

De-lever the equity of each E&P company reported in Exhibit 6 (assume d = 0.3), and use these to compute the average E&P u.

The pre-tax cost savings from the merger mentioned by CVX and OXY grow at 2% each year (i.e., about the rate of inflation) in perpetuity.

Both CVX and OXY state that they expect to reduce their annual capital expenditure by $1 billion per year after the merger with APC. But neither company provides details on which projects they plan to eliminate, or the future cash flows from these projects. Therefore, DO NOT count these as part of the value of synergies.