Gulf Oil Case Harvard Case Solution & Analysis

Introduction:

The standard oil company (Socal),situated in California,is pondering to bid on Gulf Oil  Corporation, but the question was how much to bid on the company. The CEO of Socal, George Keller would need to borrow nearly 14 million dollars so that he could make thesubstantial bid. Since the debt ratio of the Socal was considerably low, banks were willing and agreeable to lend amount of money due to which, the company could be positioned in a highly leveraged position.

For the purpose of alleviating debt, some of theassets of Gulf Oil could be sold. Keller was seeking to consider the value of the development and exploration program of Gulf Oil when calculating the future returns. The heavy money will have to be spent on the development and exploration program. Instead of this, this money could also be used to reduce the burden of debt in case of acquisition of Gulf Oil by Socal. However, the exploration program holds afuture value due to the objective of the discovery of new oil reserves.Since the company had a substantial amount of oil reserves, the discovery of future oil reserves may not be necessary (Gulf_Oil, 2017).

The exploration expenditures were increased from $561 to $ 727 million from 1980 to 1982. In 1983, Mesa Petroleum proposed an idea or alternative to the CEO of Gulf Oil for the reserves rebuilding strategy. The alternative strategy of Mesa focused on building the wealth of the shareholdersby eliminating Gulf’s development and exploration programs.

Gulf Oil Case Harvard Case Solution & Analysis

Gulf’s Value:

When the company represented for the auction, the minimum level of bid established by Gulf Oil was of about $70 per share. $30 more than the range of trading thatGulf Oil has been in a few months ago. A high premium can be charged by Gulf Oil because the worth of the shares is more than $40 dollars per share to the potential purchasers. The actual value of the $40 dollars was represented by the market value that it has to the bidders. Apart from all this, the additional value comes from the potential to control the company. In addition to this, once the company has control over Gulf Oil, there would be a potential synergy created through assets combination.

The value of Gulf Oil as a going concern is relevant because it was not planned by Socal to sell any assets of Gulf Oilapart from oil under the liquidation plan. So, all the other assets would be utilized by Socal. During the process of liquidation, Socal can choose to turn the company back to the concept of the going concern, i.e. the need to start the process of exploration for Gulf Oil. The value of Gulf Oilas a going concern is calculated by multiplying the number of shares outstanding by the share price in 1982 of $30; value: $4950 million. The price for the year 1982 is taken because this is value has been assigned by the market; the price could be driven up due to the many takeover attempts..............

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