Drilling South: Petrobras Evaluates Pecom Harvard Case Solution & Analysis

Drilling South: Petrobras Evaluates Pecom Case Solution

Introduction:

The "Drilling South: Petrobras Evaluates Pecom" is undoubtedly recognized by Building World Class Companies in Emerging Markets", as Petrobras would go through the division, then it would have the opportunity in Brazil. The firm has to make the decision that whether to acquire Pecom or not.

The case focuses on Petrobras acquiring an external organization which will help it become autonomous with the Brazilian government. The case additionally focuses on the issues of the Corporate Governance in the developing markets.Moreover,it focuses on how the shares are recorded in the US and how the companies react to the political and financial vulnerability.

Along with this, the Brazilian oil organization, Petrobras, is assessing the procurement of an Argentine oil organization, Perez Company Group (Pecom). This action would increase Petrobras' oil stock and improve its brand image globally. Pecom can be acquired on the basis that it is affected by the emergency in Argentina.

The acquisition of Pecom is a great opportunity for Petrobras for the diversification and it provides different opportunities for the underlying company. On the other hand, the production and exploration activities of Pecom are the main sources of cash.

Therefore, the objective of this case is to assess the impact of devaluation after the financial crisis in Argentina. Along with this, it includes the valuation of Pecom and to determine the appropriate discount rate after considering the country’s risk in order to value the company.

In order to value Pecom, different methods of valuation would be used such as discounted cash flow (DCF) and sensitivity analysis.

Overview of the acquisition:

The acquisition is very reasonable, however it requires regulatory approval. The main reason for the acquisition is to control the financial crises faced by the companies of Argentina. The acquisition also provides help to the shareholders by paying them more.

The reserves of Pecom including developed and undeveloped reserves are $1 billion. Out of the total reserves, 42% of the reserves of Pecom are in Argentina. Moreover, the down stream activities of Pecom include the refining operations.

The acquisition of Pecom would help the underlying company in the business value chain, as it has the largest capacity of production which would help Petrobras in order to provide the enhanced products after the acquisition. Pecom is the leader of production in Argentina and provides effective products and services to the customers. In the fertilizer market of Argentina, Pecom has one third share which would help Petrobras in diversification after the acquisition of the underlying company. Pecom isthe largest supplier of natural gas in Argentina as well as it focuses more on the generation and distribution of electricity.

The production of Petrobras is very high and it further increased after the acquisition of the production area of Pecom, which has had a positive impact on the supply chain activities of Petrobras. The acquisition of the underlying company would help Petrobras in order to expand its supply chain activities and to enhance the capability of its supply chain activities. The acquisition of Pecom would help Petrobras in the diversification.

Before the acquisition, Petrobras provided oil in Argentina and was the largest oil manufacturer as well as, the production unit of Petrobras is also large. The acquisition diversified the business of Petrobras in different sectors as well. After the acquisition, the underlying company also provided natural gas and electricity to the people of Argentina. Moreover, diversification would help to increase the profitability of the underlying company. ................

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