Amoco Case Write Up Essay

As long-term valuation is mistaken, risk free pose is set as 30-year treasury roam, 5.73%. Cost of debt is 6.72% reflecting Amocos credit 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 step-up 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 value is valued at $69,398.1 million and NPV is $51,525 million. Stock charge ordain be $37.07, indicating an exchange ratio at 0.46. This is a very conservative valuation as our DCF price is start than Amocos current market price.Regarding of multiple valuation (Chart 3), P/E ratio from corresponding firms are used, 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 rati o as much as possible. Based on our conservative evaluation of Amoco, our opening exchange ratio is 0.46. For Amoco sides, their opening exchange ratio is 1. The big struggle between our opening prices indicates this negotiating process should be tough.First, we checked the discount rate. For us, BP company, we use 8.83%, however, Amoco they use a high one around 9%. The main difference to calculate the discount rate is that we use the 30-year exchequer rate as risk free rate compared to Amoco used 20-year Treasury rate. Moreover, 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 make a large influence of the valuation price. After this, we discussed the most important promoter growth rate. Based on the assumption in the case, we use 4% as ending growth rate, 2% annual oil demand growth rate plus 2% inflation rate. However, Amoco detainment the view that the oil price would grow at 6% in long-term, and its hard for some(prenominal) of us to get a compromising rate.Therefore, we jumped to synergy and currency questions, and we agreed on the synergy that Amoco would process BP the North Americamarket and BP would use US currency to acquire Amocos share. After discussed every(prenominal) these details, we came back to the final offer price. We offered a higher one as exchange rate 0.6. Amoco rejected. Finally, subsequently they thoughtful discussion 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 reach our goals to reach the deal and build a well-grounded 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 kick downstairs 60% of the new company, still have majority control over the firm. In this deal, we paid for or so 20% premium, which is quite standard and normal. Because synergies from revenue and chemical divisions combination are not estimated nor not judge to bring benefit, the main synergy from the merge is 2 billion dollars saving of pretax operating cost.The value we establish 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). precisely this number is quite sensitive to a lot of factors, such as future energy demand, oil and gas price, industry growth potentials, ultimately affecting Amocos stand-alone and synergy valuation. Please assure 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 prescribed value created in this deal.