Kerr-Mcgree Harvard Case Solution & Analysis

Q1.  At $57.79 per share at year-end 2004, and based on an analysis of the multiples of

Comparable firms, does Kerr-McGee's stock price appear to have been undervalued?

The current stock price of Kerr-McGee is $ 57.79 per share. However, Icahn and Rosenstein considered this share price to be low than the expected share price for the company. These both active investors were concerned that the management of the company was not taking the necessary steps to maximize the wealth of the shareholders and the share price of its stock. In 1996 the share price of the company was around $72 per share. Since then the share price has been falling. The reason for this was the results of the development program were disappointing. The performance of the company in the Gulf of Mexico had been very much poor in the recent years. Apart from this, the reaction of the stock market on the acquisitions of the company was that, the market considered, Kerr McGree had paid high prices for the assets of the acquired company. Therefore, looking at these conditions of the company, it is right to say that the share price of the company is not undervalued.

Q2. What are Icahn and Rosenstein thinking? How will their proposal work? Does it make

sense?

Icahn and Rosenstein are both thinking that the management of the company is not doing anything to improve the share price of the company. The development and the finding costs of the company had exceeded over the past several years. Therefore, they are demanding that the management of the company should restructure its business. The current deep sea exploration strategy of the company was also very risky. Icahn and Rosenstein both had believed that the public perception regarding the share price of the company had worsened due to poor results of drilling, use of free cash flows and poor results of exploration. The proposed proposal focused on three core areas. Funds would be raised from the sale of the chemicals segment business and a portion of the company’s reserves would be sold in volumetric production payment. These funds would then be used to repurchase the shares of the company. This sounds logical and it makes sense. This would have a positive impact on the share price of the company. The company will then be able to focus on the other segments of the business. This would manage the operations more smoothly and improve the cash flows of the business.

Q3. Why is Corbett opposed to restructuring the firm? How should he respond?

The view of Corbett regarding the performance of the company is opposite to those of Icahn and Rosenstein. He was against the proposed proposal for restructuring the company. According to him the proposal would reduce the marketable reserves of the company. Apart from this it would not allow for the timely exploitation of its large inventory of undeveloped reserves and would limit the ability to conduct exploratory drilling activities. He was also against the sales of the chemical business, because he considered this segment of the company to be the core competency of the business because of technological advantage, cost and quality. However, Corbett should analyze the proposal in detail before reaching to a final decision.........................

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