1.

Important Characteristics of Buyers Industry:

The Oil and Gas sector includes the oil and gas extraction industry as well as petroleum
refining. The United States is the world's third-largest petroleum producer, with more than
500,000 producing wells and approximately 4,000 oil and natural gas platforms operating in U.S.
waters. Together, oil and gas supply 65 percent of U.S. energy. The nation's 144 refineries
process more than 17 million barrels of crude oil every day. Oil and gas production facilities
include 16,000 establishments with a value of shipments of $134 billion.

Industries in the oil and gas extraction industry operate and/or develop oil and gas field
properties. Such activities may include exploration for crude petroleum and natural gas; drilling,
completing, and equipping wells; operating separators, emulsion breakers, desilting equipment,
and field gathering lines for crude petroleum and natural gas; and all other activities in the
preparation of oil and gas up to the point of shipment from the producing property. The
petroleum refining industry comprises establishments primarily engaged in refining crude
petroleum into refined petroleum. Petroleum refining involves one or more of the following
activities: fractionation; straight distillation of crude oil; and cracking.

2. Challenges faced by the industry over the 5 years prior to the transaction:

a. Rise in the prices of petroleum per barrel

b. Economic uncertainty may spark supply shortages
c. Elevated expenses squeeze margins
d. Regulatory complexity
e. Talent shortages loom
f. Market access limited by resource nationalism
g. The lack of long term energy policy

3. Outlook for the industry over next 5-10 years as of time of transaction:
Production for North America accounted for 17 % of global oil production and 26% of
natural gas extraction in 2010. According to KPMGs 2012 energy survey, 61% of participating
energy firms says that shale oil and gas will be the alternative energy source to which they will
allocate most investment, up to 44% in 2012.
Investment in shale gas could also begin to displace investment in renewable energy
despite the fact that global investment in renewable energy projects exceeded investment in fossil
fuel power projects for the first time in 2011. In fact, 61% of survey respondents believe that
renewable energy investment will begin to decline as government subsidy programs become
harder to reconcile with budget shortfalls and as other cheaper energy sources such as shale gas
become more prevalent.
Oil and gas will likely have limited demand growth in the United States and Canada over
the next five to ten years. The slow economic recovery of North America and Europe, increasing
energy efficiency, and increased use of renewable energy sources all contribute to this outlook.
Over the next five to ten years, the majority of marginal growth in both oil and gas demand will
likely come from emerging market economies like china. The total annual primary energy
demand for oil in the United States is forecast to drop by around 5% between 2010 and 2020.
Overall, slow demand growth for oil and natural gas will likely lead to a limited increase
in oil prices over the next ten years. However, in both the oil and natural gas markets, other
factors will likely influence price developments and potential uncertainties over the forecast
period. Oxford economics expects oil to average US$ 109 in 2013 and US$ 113 in 2014.
1. Reasons provided by Buyer and seller:
The core assets being acquired strongly complement Anadarkos existing properties,
providing the scale and focus needed to deliver more robust, predictable and efficient growth.
Kerr-McGees outstanding deepwater holdings and skill sets will elevate Anadarko into the top
echelon of deepwater operators. Similarly, Kerr-McGees long-lived natural gas resource plays in
Colorado and Utah, along with Western Gas Resources in Wyoming, will combine with
Anadarkos assets to make us one of the largest producers in several of the most prolific basins in
the Rockies. Together, these acquisitions create a more focused portfolio, which will enhance our
ability to deliver very competitive growth rates and returns. These transactions make a lot of
sense for Anadarko shareholders. We expect to hedge up to 75 percent of the acquired production
through late 2008 using a series of three-way collars, with floors designed to ensure a return on
our investment and ceilings that allow considerable upside. We also expect cost reductions as we
consolidate certain administrative functions, but the biggest synergies are expected to come from
combining the complementary assets of the three companies and the skills of their employees.
2. Reasons stated in financial press:
Both companies have certain assets that will likely deem to be non-core once combined.
Even with divestitures that could generate substantial after-tax proceeds, both expect the
proposed acquisitions to be accretive to both earnings and cash flow on a pro forma basis.
 1. How did this particular transaction fit into the broad strategy of the acquiring firm?
The selling firm?
The transaction is consistent with Anadarkos strategy, which is built around the companys core
competencies in unconventional resource development and high impact exploration. Anadarko
unveiled a strategy that included a solid North American foundation of onshore resource plays, a
growing deepwater Gulf of Mexico program and an expanding international portfolio. Kerr-
McGee and Western Gas Resources strengthen Anadarkos position on all three counts, with
captured growth projects that are consistent with our core skill sets. The transaction will enable
Anadarko to create a more focused operating strategy with a larger and lower-risk asset base.
2. Was the acquisition related or unrelated to buyers operations at time of deal?
1. Deal structure:
2. How large was the premium paid to the target:
Anadarko has agreed to acquire Kerr-McGee Corporation in an all-cash transaction
totaling $16.4 billion, or $70.50 per Kerr-McGee share, plus the assumption of net debt and other
liabilities estimated at $1.6 billion. Anadarko is offering Kerr-McGee and Westerns shareholders
significant premiums over the companies recent current stock prices.
3. How was the deal financed:
Anadarko will finance the acquisition through an $18 billion, 364-day committed acquisition
facility provided by UBS, Credit Suisse and Citigroup. Anadarko plans to use proceeds from
asset sales, free cash flow from operations and the issuance of equity to reduce debt over the
next 18 to 24 months.
1. Stock market reaction:
2. Security analyst reaction.
Analysts say that while the move, which more than doubles Anadarko's annual sales, is bold
and gives it a bigger footprint in the Gulf of Mexico and Rocky Mountains, it could be too
much for the company to swallow at once. Some analysts identified other potential takeover
targets.
By acquiring both Kerr-McGee and Western Gas Resources, Anadarko will significantly
enhance its Rockies gas position while adding upside exploration in the deepwater Gulf of
Mexico along with other international exploration plays in Brazil and China. Our primary
concern is that Anadarko may need to book a lot of goodwill or put a fair amount of purchase
costs in "unamortized" properties in order to avoid dilution.
 Given the premiums paid, the all cash offer, and $493 million break-up fee associated
with the Kerr-McGee/Anadarko transaction, we do not believe there will be a bidding war for
the companies. [The] group should trade up today. In addition to the larger independents,
which should all respond, we believe specific names which may outperform [as potential
takeover targets] include Noble Energy, Forest Oil, Gasco Energy, Newfield Exploration, and
Ultra Petroleum.
1. How did this acquisition compare to others, if any, made by buyer in previous 5
years with respect to size and premium paid?
Anadarko acquired Union pacific resources group in 2000. This was a stock for
stock agreement. The ratio of stock was 0.4550:1(Anadarko : Union Pacific). After the
transaction, Anadarko will own 53% shares of the combined company and 47% will be
owned by UPR. Anadarko paid 21% premium.
This was a stock for stock agreement while the acquisition of Kerr McGee was all
cash agreement. Anadarko paid $18 billion. One share was purchased for $70.50. A
premium of 40% was paid.
2. Does this acquisition break the strategic pattern of usual transactions by the buyer?
3. Select two or three key competitors of Buyer and compare the recent acquisition
program (last 3-5 years) of these companies to that of the Buyer. (If the buyer is a
private equity fund, discuss the acquisition program of other similar funds.)
Company Name Anadarko BP Amco Chevron Texaco
Year of Merger 2006 2000 2005
Value of merger $18 Billion $26.8 Billion $18.4 Billion
Cash and stock
75% Stock and 25%
All share with cash. Exchange ratio
exchange ratio of 1.03:1
0.82:1 (BP:Arco), (Chevron:Unocal),
Type of transaction All Cash
BP will buy Chevron will buy
64,861,671 shares of 210 million shares of
Arco. Unocal at $65/Share
and 4.4 billion in
cash
Premium paid 40% 26% 23%
 Unocal would bring
an additional 1.7
billion barrels of oil
equivalent reserves,
Pre tax synergy of $1
Future Growth, on to grow profitably in
billion, future
shore Platforms, core upstream areas,
Synergies growth, boost
production from the build new legacy
reserves and
rockies positions and
production
commercialize our
large undeveloped
natural gas resource
base
No talk clause,
Termination fees Breakup fee $450
Poison pills breakup fees $350
$493 million million
million

3. Is the role of acquisitions (size and type) similar for each of the 2 or 3 major firms
studied? Do the competitors rely more on internal growth? If not, discuss any differences.
The size of the acquisitions was almost same for the two competitors but there was difference
in the type of transaction. The Anadarko acquisition of Kerr McGee was all cash transaction,
for BP Amco all share transaction and for Chevron it was a mix of cash and stock transaction.
All the three transactions had the same objective of future growth and captureing market
share
I. IMPACT OF ANNOUNCED ACQUISITION ON BUYERS FINANCIAL STATEMENTS
1. Based on the announced deal, what effect would consummation have on buyers debt
ratios, credit ratings and earnings?
The debt to equity ratio of Anadarko before acquisition in 2005 was 0.56.the debt to
equity ratio jumped up to 0.90 in 2006 due to the acquisition of Kerr McGee and Western Gas.
The company financed these transactions through loan of $24 Billion which increased their D/E
ratio.
 The acquisition had the objective to increase earnings. The earnings were 0.365 in 2005
but due to the acquisitions in 2006, the earnings fell to 0.245, as most of the efforts were directed
to complete the acquisition. Funds were also allocated in the transaction. After that, when the
company started its combined operations with the acquired company in mountains, Rockies and
on shore oil production, earnings grew to 0.250.

1 Was the buyers announcement preceded by other large acquisitions in the same industry?

Yes, the buyers announcement was preceded by several large acquisitions in the oil and
gas industry.

Acquirer Acquired Value date

Shell Transport and
Royal Dutch Shell $ 80 Billion 28/10/2004
Trading
Chevron Texaco Unocal
BP Amoco Arco
Conoco Inc. Philips Petroleum $ 15.17 30/08/2002

2. What influence do you think the prior acquisitions had on the decision for the buyer to
announce this deal?

The deregulation in oil and gas industry of USA made easy for the companies to merge
with each other. A wave of mergers and acquisitions in USA started in 1999, which was at its
peak point in 2006-07. Companies acquired other firms in the same industry to increase their
production, increase market share, and expand their operations to the areas where reserves were
available.

Anadarkos strategy included a solid North American foundation of onshore resource

play, a growing deep water Gulf of Mexico program, and an expanding international portfolio.
To implement this strategy, they needed a company with their operations concentrated in onshore
resources. As the objectives of Anadarko matched with that of the industry, it means that this
transaction of Anadarkos acquisition was the result of the acquisition wave.
3. Was the buyers announcement followed by other large (over $1 billion) acquisitions in the
same industry? List these acquisitions and whether you believe they were motivated or a result of
the buyers acquisition under study.

J. IMPACT OF ACQUISITION ON INDUSTRY STRUCTURE

4. Do you believe the acquisition under study will cause more acquisitions in the buyers
industry? Why?
Yes, buyers acquisition will cause more acquisitions to follow in the oil and gas industry.
The reason is that when his acquisition was announced, share price of Anadarko fell from $48 to
$45. Financial analyst called it a heat of hunt. Shareholders were disagree on the transaction as it
was one of the largest deal in the industry. Standard & Poor's Ratings Services saw the news as a
potential negative for Anadarko's credit but a potential positive for the target companies. S&P
placed all on CreditWatch: Anadarko (BBB+/A-2) negative, KMG and Western positive.
Moody's Investors Service took a similar stance.
But Anadarkos CEO Hackett was sure about the success of this transaction. He said in a
meeting, The fact that spot gas markets and equities got a little weaker over the last two weeks
didn't really change the value of the assets," Hackett said. "In fact, if you went out and sold these
assets in the open market, they'd generate a tremendous arbitrage with where the equities are.
The correlation is really high. So long-term value hasn't become any different. The arbitrage has
simply increased in proportion to the decline in the stock price." This transaction did so and
compelled other large companies to merge with others to increase their productivity and
profitability.
5. What impact do you believe the acquisition under study will have on the buyers market
share? On buyers competitive advantage? On growth? On profitability?
This acquisition will increase the market share of the Anadarko because it will create a
combined company with industry-leading positions in the deep water Gulf of Mexico (GOM)
and the Rocky mountain region, two of the fastest-growing oil and natural gas producing regions
in North America. The core assets being acquired strongly complement Anadarko's existing
properties, providing the scale and focus needed to deliver more robust, predictable and efficient
growth.
 The competitive advantage is that this transaction The combined market capitalization of
Anadarko Petroleum Corp. and its latest acquisition targets -- Kerr-McGee Corp. and Western
Gas Resources Inc. -- comes to nearly $41 billion, almost double that of Anadarko alone and
rivaling EnCana Corp. at $42.28 billion. Anadarko will become 6 th largest company in oil and
gas industry.

As the company will start its operations in deep water Gulf of Mexico and the rocky
mountain, there will be significant growth in its production. KMG's year-end 2005 proved
reserves (excluding pending Gulf of Mexico Shelf divestitures) totaled 898 million boe, of which
approximately 62% is natural gas. Proven undeveloped reserves represented 30% of the total.
Production in 2006 is expected to be about 92 million boe, with natural gas representing
approximately 60%. Anadarko expects to ultimately recover more than 3.1 billion boe on the
KMG properties, at a full-cycle cost of approximately $39.2 billion ($12.40/boe), including the
acquisition cost. Another synergy that will boost up the production is skilled labor. Kerr McGee
has skilled labors, which will help Anadarko to achieve their targets.

K. DEAL HISTORY
1. What was the length of discussions between buyer and seller?
The length of discussions between buyer and seller was about 1 month and 18 days. The
discussions started on 23rd June, 2006 and ended on 10th Aug, 2006 when the CEO of Anadarko
announced the completion of the acquisition.
4. Describe defensive measures employed by seller either before or after the deal announcement.
As the deal was unanimously approved by the shareholders of Kerr McGee, there were
no such defensive measures except the termination fees. Any one of the party with draw from the
transaction, will pay $493 million as a termination fee to the counter party.
L. SUBSEQUENT PERFORMANCE AND APPRAISAL (ASSUMING DEAL CLOSED)
1. Initial changes after the transaction due to acquisition (e.g., layoffs, divestitures, changes in
sellers management).

After the acquisition was completed, 2000 employees were laid off. This acquisition was
a leverage buy out. A loan of $10.9 billion was raised. To overcome this amount, Anadarko sold
its properties situated in Canada, the US, Northern Rockies, Taxas, Louisiana and the Gulf of
Mexico. Other candidates for divestiture include non-exploration properties in Qatar and
Venezuela. However, Anadarko is not expected to sell any of its Alaska properties under the
companys current divested programs.

Charles A. Meloy joined Anadarko's executive management team as Senior Vice

President of Gulf of Mexico and International Operations. Meloy was previously Vice President
of Exploration and Production at Kerr-McGee Corporation.

One of the key components of the acquisitions of Kerr-McGee and Western Gas Resources is the
talented workforce who will be joining Anadarko. Meloy joined the following Anadarko
executives, some of whom are taking on new roles in the combined organization.

Robert P. Daniels, Senior Vice President, Worldwide Exploration

Karl F. Kurz, Senior Vice President, North America Operations, Midstream and
Marketing

Mark L. Pease, Senior Vice President, E&P Technology & Services

Robert K. Reeves, Senior Vice President, Corporate Affairs and Law

R. A. Walker, Senior Vice President, Finance & Chief Financial Officer

Luke R. Corbett, formerly Chairman and CEO of Kerr-McGee Corporation, has been appointed
to Anadarko's Board of Directors.

2. Measure the performance of the Buyer and the selected 2-3 key competitors by:
(1) Total return to shareholders over past 5 years.
(2) Return on equity over this time frame.
(3) Compare (1) and (2) above to benchmarks such as industry total return and return on
equity.
3. Has the Buyer firm performed well for its shareholders over this time frame?
Yes, the buyer performed well for its shareholders. Statistical data shows that return on
equity in 2005 were 21.9 which climbed up to 38.2 in 2006. Oil reserves were in 2005 which
increased to ______ due to the acquisition of Kerr McGee. The value of Anadarko after the
acquisition was almost $41 billion, double to that of prior to the acquisition.
4. Does there appear to be any differences between the performance of the Buyer and the two or
three key competitors selected? Does this difference appear to be attributable to the degree the
firm relied on external growth?
5. With the benefit of hindsight, did the Buyer make mistakes with its major strategies and
investment thrusts (both internal and external)?
M. LOOKING AHEAD
1. Has the Buyer positioned itself wisely in relation to its industry for future value creation?
Discuss your reasoning.
2. What are some major changes in strategic direction the Buyer firm could make to improve its
current performance and prospects?
3. What must buyer still do to make this acquisition successful?
O. DRAWING SOME CONCLUSIONS
1. Which of the companies studied (Buyer and 2-3 key competitors) seemed to have followed the
best strategy and execution?
2. Does one company appear to be consistently better than the others?
3. What is the source of its superiority?
4. If you were the Buyers CEO, would you have done anything differently? Explain.
5. Do you think the Buyer will create value on this acquisition? Why or why not?