DRILLING SOUTH: PETROBRAS EVALUATES PECOM Harvard Case Solution & Analysis

DRILLING SOUTH: PETROBRAS EVALUATES PECOM Case Solution

Question 1

Does the purchase of Pecom is convenient for the strategy of diversification & expansion of Petrobas? Display a Financial-Economic assessment that supports your response.

There had been many recent corporate governance changes at Petrobas Company and the changes in the management structure and the corporate governance principles of the organization had given it more independence from the Brazilian government. Most of the management of the company was eager to explore new opportunities for the company specially the acquisition of the Argentinean firm, Pecom. However, some of the managers were also cautious about this. New management policies had been implemented at the company and new management structures had been formulated in the organization.

The management of the company and the board of directors had created a long term strategic plan for the organization which was evaluated by creating specific performance targets. With these significant changes and the corporate restructuring had made the company to stand apart from the typical Latin American oil companies. The reason for this was the private company mentality and the market oriented view of the company which was now placing the company as a private company in Brazil. Along with this, the management of Petrobas Company was also committed for global expansion and currently it did not have any roots in the international markets of the world.

The objective of the company was to build a portfolio of international assets in Latin America through geographic diversification. It also wanted to extend its boundaries towards West Africa, Caribbean and the Gulf of Mexico. Pecom as an acquisition through diversification target for Petrobas Company is a good opportunity as it has been forecasted that by the end of the year 2005, the total production of Pecom would reach to a level of 400 tbpd and most of the production would be outside Argentina.
It had established operations in Peru, Ecuador, Brazil and Bolivia. Therefore, Pecom is a good target for Petrobas Company for attaining its expansion and diversification strategy and take advantage of its deep water expertise. The financial performance of Pecom had been worsening due to the political instability of Argentina, devaluation of its currency against dollar, high risk of losses. The short term situation in Argentina for Pecom was worse as compared to its long term position.

Therefore, the sale of the company was probably a good solution to the problem of the company and this was a good opportunity for Petrobas Company. However, there were also certain issues associated with this acquisition opportunity for Petrobas Company. For instance, the elections were about to be held in October 2002 and the candidate for the president, Lula da Silva was not liking the independence of such companies as Petrobas and he was more in favor of privatization. Moreover, in financial terms, the valuation of Pecom was also complicated by many factors such as the country risk of Argentina and the calculation of the cost of capital. Overall, this is a good opportunity for Petrobas Company for achieving its diversification and expansion objectives however; a detailed evaluation needs to be performed by Batista along with the valuation of Pecom to make the final recommendation......................

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