John Seitz, president and chief operating
office of Anadarko Petroleum Corp., outlined seven key elements
to a successful merger or acquisition.
♦ Understanding and actively managing portfolio risk is a critical
duty of senior E&P executives.
"Few executives have a clear vision of either upside
or downside risk in their portfolio, including geologic risk, political
risk, project time horizon, commodity price risk, macroeconomic
risk or asset distribution in the life cycle," Seitz said. "Independents
must balance a strong focus with the need for diversification."
Seitz highlighted two Anadarko acquisitions to illustrate
- Anadarko's deal for Union Pacific Resources -- the company
sought to reduce the heavy reliance of its international portfolio
on the enormous Algerian project. The acquisition established
an asset base for Canadian operations.
- The acquisition of Berkeley Petroleum -- it provided higher
risk/reward projects to balance the low-risk opportunities gained
through the UPR deal.
♦ A company must be able to clearly identify how a deal enhances the
firm's competitive advantage.
"A murky strategy vision equals bad decisions," Seitz
said. "Every deal should solve a problem, not provide a Band-Aid."
Also, he continued, management should be honest about
the real motivation behind a deal.
"Do we want to get bigger, have we run out of good
ideas, or does the market expect us to do a deal?"
Going into the UPR acquisition Anadarko had identified
a strategic need to increase cash flow to fund known opportunities.
The Berkeley deal provided an exploration program that helped fill
a gap in the middle of Anadarko's portfolio.
♦ Have a rigorous scientific analysis of assets and opportunities
as well as realistic risking.
A company should take a simultaneous top-down and
bottom-up approach when analyzing a deal -- and fail early if a
project isn't doable, he said.
Also, management can play devil's advocate with the
evaluation team: While evaluating the UPR deal, Anadarko:
- Carried out an extremely intensive engineering and exploration
effort to understand the asset base.
- Had third parties confirm the results.
- Built economic models that allowed valuations at multiple risk
Anadarko's Canadian operations had previously identified
Berkeley's assets as a desirable target and Anadarko's experience
in executing large exploration programs increased confidence in
♦ Buy at the right price -- which relies largely on the discipline
to reject creeping values.
"A good deal is accretive to the acquirer's net asset
value," Seitz said. "When pursuing a merger or acquisition it's
good to pursue multiple targets simultaneously, avoid prolonged
bidding wars and be willing to quit deep into negotiations.
"Plus, convincing the other company shareholders
of the wisdom of accepting a low upfront premium is helpful."
Accepting a modest initial premium made UPR shareholders
the biggest winners to emerge from the merger process, and Anadarko's
deal for Berkeley sought to take advantage of relatively cheap valuations
for premium Canadian assets, he said.
♦ Buy when the timing is right.
"Chasing mergers during periods of high equity/commodity
prices involves high risk," Seitz observed, "but stock as currency
mitigates vulnerability, and hedging may lock in a rate of return.
Good timing is unappreciated in the short-term, but may leverage
Anadarko's conviction in the strength of natural
gas fundamentals led the company to initiate discussions with UPR
when the gas price was $2.50.
"And," Seitz added, "Anadarko's deal for Berkeley
sought to take advantage of relatively cheap valuations for premium
♦ Sell the deal to Wall Street.
A deal must have external as well as internal logic.
- The acquiring company must demonstrate detailed knowledge of
the assets when a deal is announced.
- Meetings should be scheduled with every major shareholder to
- And remember, large deals create opportunities to access new
"Initial reaction to the Anadarko-UPR deal was negative,
but we were able to convincingly explain the merits of the deal,
leading Anadarko's share price to more than double in six months,"
Seitz said. "Likewise, Anadarko was able to show investors the complementary
fit of Berkeley with the existing asset base."
♦ Execute the business play.
"The act of merging per se does not create value,"
he warned. "It's important to maintain momentum through the merger
process, but success can only be judged three to five years down
the road. The lessons learned from each deal must be carried into
Anadarko, he continued, hit the ground running on
both the UPR and the Berkeley acquisitions.
"We were able to ramp up the rig count aggressively
even during the due diligence and physical merger phases of the
UPR deal," he said.
For example, Anadarko and UPR expertise working together
have improved the outlook for the Austin Chalk play in East Texas,
"The combined opportunity set of Anadarko and Berkeley
will be high graded over the next few months, and we are accelerating
the Berkeley drilling program for 2001."