Amoco Case Write Up Essay

As long-term paygrade is assumed, risk free set is set as 30-year treasury rate, 5.73%. Cost of debt is 6.72% reflecting Amocos assign level. Cost of equity is calculated as 10.63%, leading to final WACC at 8.85% (Chart 1).In DCF valuation (Chart 2), long-term growth rate is assumed to be 4%. Change in working capital is calculated as the average of 1997 and 1996 figure and is assumed to be constant for simplicity. Terminal shelter is pryd at $69,398.1 million and NPV is $51,525 million. Stock price will be $37.07, indicating an exchange ratio at 0.46. This is a very conservative valuation as our DCF price is lower than Amocos current market price.Regarding of triple valuation (Chart 3), P/E ratio from comparable firms are utilisationd, which leads us to an exchange ratio at 0.68. Thus, our estimation for Amocos stand-alone value is from $37.07 to $54.69 per share, i.e. 0.46 to 0.68-exchange ratio.As the acquirer, our basic negotiating strategy is to low the exchange ratio as much as possible. Based on our conservative evaluation of Amoco, our initiation exchange ratio is 0.46. For Amoco sides, their opening exchange ratio is 1. The big residue between our opening prices indicates this negotiating process should be tough.First, we checked the discount rate. For us, BP company, we engage 8.83%, however, Amoco they character a higher(prenominal) one around 9%. The master(prenominal) difference to calculate the discount rate is that we use the 30-year Treasury rate as risk free rate compared to Amoco used 20-year Treasury rate. Moreoer, we use the debt to debt plus equity but they use debt to equity to calculate WACC. To compromise these differences, we agree to use the average discount rate that doesnt pull ahead a large influence of the valuation price. After this, we discussed the most crucial factor growth rate. Based on the assumption in the case, we use 4% as net growth rate, 2% annual inunct demand growth rate plus 2% inflation rate. Howeve r, Amoco lay down the view that the oil price would grow at 6% in long-term, and its hard for both of us to get a compromise rate.Therefore, we jumped to synergy and currency questions, and we agreed on the synergy that Amoco would ingest BP the spousal relationship Americamarket and BP would use US currency to acquire Amocos share. After discussed all these details, we came back to the final offer price. We offered a higher one as exchange rate 0.6. Amoco rejected. Finally, after they thoughtful handling they offered 0.66 exchange rate or price 52.965 as their final offer, which for us is lower than our walk-away price 65.94. Therefore, we accepted this offer and we both fix our goals to reach the deal and build a good relationship with the other management team.The previous 959.6m Amoco shares will convert into 633.336m shares of BP ADS equivalent, with the previous 965.6m ADS shares, BP shareholders will take grapheme 60% of the new company, nonoperational have majority control over the firm. In this deal, we paid for about 20% premium, which is kinda standard and normal. Because synergies from gross and chemical divisions combination are not estimated nor not expected to bring benefit, the main synergy from the merge is 2 billion dollars saving of pretax direct cost.The value we create for our shareholders is $14,840.06 million (Amoco stand-alone value $46,430 million+ synergy $2 billion price paid for Amoco $33,538.94). But this number is quite tippy to a lot of factors, such as future muscularity demand, oil and gas price, industry growth potentials, ultimately affecting Amocos stand-alone and synergy valuation. Please see the chart 4 of sensitive analysis of Amocos stand-alone value according to the change of terminal growth rate in the appendices. But even modest assumptions still can lead to positive value created in this deal.