Gulf Oil Summary Essay
Company. He has to make a decision on how much to bid to win against competitors like Atlantic
Richfield Company (ARCO) and Kohlberg Kravis Roberts & Company. These competitors are willing to pay $70 or more. Although ARCO is willing to pay this price, its debt to total capital ratio could amount up to 60%, which is risky for a company. On the other hand, Socal debt to equity ratio is low. This means that banks are willing to lend money to the company to acquire Gulf Oil Corporation. Kohlberg Kravis
Roberts & Company’s advantage lays in the fact that it is willing to preserve the current structure of Gulf
Oil until …show more content…
direct result of its concentration on oil, and its efforts on exploration and development. However, after it is acquired by Socal, its debt will also transfer to the acquisitor. The plan for Keller is to sell Gulf Oil’s assets, and stop the exploration and development efforts to soak up debt. The price at which Keller makes the bid has a direct impact on Socal’s long term debt. At a price of $70 per share, Socal will have worth
$15, 761 million debt compared to $19, 068 million at a price of $90.
Acquiring Gulf Oil company could benefit Socal, however it is not easy to precisely estimate the future profits. One of the reasons is because Gulf Oil has a large amount of debt. It’s current total amount of debt is $10,836 million. Deciding how to get rid of this debt after acquiring Gulf can be difficult.
Kohlberg Kravis offered to leave Gulf’s company structure the same leaving Gulf’s assets unaffected.
Keller’s strategy is to use Gulf’s assets to reduce the company’s debt. In this sight, Kohlberg’s view for the future of the company is more in line with the one wanted by Gulf’s management. Should Keller make a similar offer to the one from Kohlberg? What bid price would represent the best bet for a positive net present value?
Another important factor to evaluate is the value that Gulf’s reserves would add