Question

  At the time when natural gas and oil prices were at record levels, oil and natural gas producer Andarko Petroleum announced the acquisition between two competitors, Kerr-McGee Corp, and Western Gas Resources, for 16.4 billion and 4.7 billion in cash , respectively. The acquired assets complemented Adarko’s operations, providing the scale and focus necessary to cut overlapping expenses and concentrate resources in adjacent properties. What do you believe were the primary forces driving Andarko’s acquisition? How will greater scale and focus help Andarko, cut cost? What are the assumptions implicit in your answer to the first question?

Answer 1

I.Primary forces driving Andarko's aquisition:

The following points discussed below are considered to be the primary driving forces that lead to the aquisition of Kerr-McGee Corp and Western Gas resources into Andarko's operations:

1. Benefits from increased assets: The plant and machinery and other allied machinery which are used in discovery and exploration of oil and natural gas resources will increase as a result of acquisition of companies in the same industry which in turn leads to economies of large scale operations.

2. Benefits from reduction in competition: Acquisition of companies having similar operations in the industry helps to increase the profits of our company by way of benefits of operations in large scale, cutting down costs and reduced competition. Thus helps in increasing the net worth of the company and also providing greater returns for the investors.

3. Reduced costs in proceesing of crude oil : Due to large volume of crude oil processing, there will be decreased costs of processing.

4. Increased market operations: The volume of operations helps the company to acquire greater market share thereby increasing the revenue and profits to the acquired company.

II. Role of greater scale for Andarko in focusing and cutting down costs:

The operations of large scale helps Andarko to focus more on the production as the volume is high and there is an advantage of technological aspects flowing to the entity. Employees with specialization will increase as a result of acquisition and helps them working in effective and efficient manner and stay focused on what they are doing. Repeated and unwanted expenditure can be avoided as the aquisition helps in providing more channels of the other entities. It also helps in cutting down the costs as the production volume is increased whereas the manpower remains same.

All the above points are base on the assumption that the company which acquired the other two companies from the same industry will perform in an efficient manner to best utilise the benefits flowing from the other two entities.