Anadarko’s Acquisitions, Case Study Example

Anadarko’s historical growth has primarily been internal-driven. Anadarko’s ex-CEO Bob Allison preferred growth through exploration projects instead of acquisitions (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009). While we remain committed to exploration projects, the acquisitions of Kerr-McGee and Western Gas Resources (Western) will make a valuable addition to Anadarko for the following reasons:

All three companies are in similar line of business, thus, integration of operations and culture will be relatively quick and more efficient. In addition, Anadarko’s leaders understand both companies really well due to their professional histories. CEO Hackett collaborated with Kerr-McGee while he was leading Ocean Energy. Similarly, CFO Walker got to know Western’s management well during his stint at Prudential Capital (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009). Since Anadarko’ leaders already understand the acquisition targets well, they will be able to integrate the acquired companies’ operations with Anadarko in a short period of time.

Kerr-McGee’s and Western’s assets are located in areas that complement Anadarko’s objectives and goals and in addition, many of the assets of these tree companies are in close proximity of each other. Examples include Anadarko’s and Kerr-McGee’s assets in Gulf of Mexico and Anadarko’s and Western’s assets in Wyoming’s Powder River Basin (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009). Anadarko is concerned about its international exposure due to unfavorable political factors and wants to focus more on domestic holdings (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009). The fact that Kerr-McGee and Western have assets that lie in close proximity to Anadarko’s own assets will enable the company to expand scale while achieving operating efficiencies at the same time.

By acquiring Kerr-McGee and Western, Anadarko will get access to some of the most talented engineers in the industry such as Kerr-McGee’s deepwater people with strong project management and operation skills (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

Acquiring Kerr-McGee and Western will also help Anadarko become more profitable as well as efficient in its operations. Examples include Kerr-McGee’s SPAR technology which will significantly reduce the duration of exploration projects (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

One cannot analyze the merits of acquisition targets without taking into account the potential risks. Both acquisitions will cost the company approximately $23.3 billion including assumption of debt and are all-cash deals. The deals will have a negative impact on the company’s operating liquidity in the short term because interest payments for the credit facility will alone equal $3.5 million per day (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009). It is also possible that management’s expectations regarding the benefits may be over-optimistic which means the company may end up paying more than the actual value of the acquired companies. Anadarko is paying 40% premium to Kerr-McGee’s shareholders and about 50% premium to Western’s shareholders (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009) which are quite high prices for acquisitions. The prices being paid only reflect the leadership’s confidence in the value of acquisitions to Anadarko’s long term future.

We have carefully thought over the consolidation of the operations of these three companies:

Our integration plan includes keeping the most profitable assets and selling the least profitable ones just like Anadarko’s management did in 2004 when we sold U.S. onshore assets that were 30% of the company’s total fields but only accounted for 4% of the company’s reserves and 7% production in 2003. This will help us improve asset utilization rates as well as profitability.

Anadarko has been historically great at identifying opportunities, thus, Kerr-McGee and Western will be very valuable acquisitions due to their cash-generating abilities.

In order to finance the acquisitions, we have secured a generous credit facility of $24 billion. We plan to pay back the debt on an urgent basis through internally generated free cash flow, divestures of asset worth about $10-15 billion, and an equity issue of up to $5 billion (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

The management is also determined to present a strong case to the investors. We believe this deal will provide all the benefits that the investors look for in an acquisition. We will hold an investors’ conference call and invite them to present their concerns and questions.

We plan to communication the advantages of these acquisitions some of which are:

Anadarko will become much more efficient due to the proprietary technologies it will acquire and that have proven themselves to significantly reduce duration and costs of exploration and production activities. An example is Kerr-McGee’s ‘hub and spoke’ infrastructure which enables the standardization of design and construction of exploration platforms (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

Anadarko’s operating efficiency will significantly. First of all, the company will retain assets with the most growth potential. In addition, it will acquire Kerr-McGee’s employees with extensive deepwater exploration and project management skills (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009) as well as Western’s marketing team with strong understanding of the gas markets (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

Anadarko will gain valuable sources of cash flows that could be used to finance its exploration and production projects.

The company has plans to reduce the added leverage as a result of these acquisitions through a mix of free cash flows, divesture of less profitable assets, and an equity issue (CHRISTENSEN, Clayton M. and Rising, Curtis B., October 19, 2009).

We have also advised our investor relations department to respond to all relevant inquiries that may come because the management believes in an open communication with all of its stakeholders.

References

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.3.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.8.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.10.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.11.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.5.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.15.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.14.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.15.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.10.

CHRISTENSEN, Clayton M. and Curtis B. RISING. October 19, 2009. A Big (Double) Deal: Anadarko’s Acquisition of Kerr-McGee and Western Gas Resources., p.11.