Question

What are the key benefits and risks for Petrobras in acquiring Pecom in 2002?

Harvard Case: Drilling South: Petrobras Evaluates Pecom

Answer 1

ADVANTAGES:

•To speak about the advantages, first of all, Pecom fits exactly to Petrobras's targets, because Petrobras wants to expand internationally and Argentina is so close to Brazil.

•Moreover, it's the second largest market in South America. Additionally, the acquisition will significantly increase Petrobras's oil and gas production and add to its oil reserves. It will also provide Petrobras with considerable foreign interests.

•Furthermore, Petrobras will have access to Pecom's management team which is very experienced internationally. Then, Pecom means the spreading of risk for Petrobras. Also, the case says that Pecom had taken an important step in 1994 when it started operations in Venezuela and then expanded into Brazil, Bolivia, Ecuador and Peru.

•Pecom's shares were also listed on Buenos Aires Stock Exchange and New York Stock Exchange. So, Petrobras will also receive some advantages on these points.

•Next, Pecom had the region's largest capacity for styrene and polystyrene production, and was a leader in Argentina on these products. In addition, Pecom had over a one-third share of the fertilizer market in Argentina.

•Following that, Pecom had the largest transporter of natural gas in Argentina and operated 75% of the country's high-voltage power transmission system, and had an exclusive license to serve both the residential population and commercial films in the central and southern Buones Aires metropolitan area.

DISADVANTAGES:

• Despite these several advantages, the disadvantages were really severe.

•For example, the most eye-catching factor was that there was a major crisis in Argentina. This meant the country risk and economic situation in Argentina was frightening.

•Moreover, the timing for Petrobras was also not good, because they had the general elections coming up in a few weeks and one of the leading candidates for president did not fully support Petrobras's increasing autonomy.

•Then, Pecom was faced to a great deal of dollar based debts because of the financial crisis in Argentina. Besides, Pecom faced a pending export tax that could be levied on up to 40% of the company's Argentine oil export revenue.

•Maybe the worst factor was that Pecom held $231 million in cash and short term investments and its debt and other financial obligations to the end of the year amounted to $840 million! So the company was in a huge loss!

•To solve all of these problems, Pecom and its external advisors had been working on different alternatives, but no solution was reached. In regards to this issue, the company owned sound assets, but it could not simply divest selected assets without jeopardizing its longer term growth prospects.

•As if all of these were not enough, the local banking system was in crisis and international bankers were reluctant to increase their exposure to an emerging market economy. Pecom's management and shareholders had to find a solution before going into bankruptcy.

•The acquisition was also a difficult one in terms of law. Because the deal required regulatory approval. Finally, currency devaluation, political instability, capital controls, determination of risk [premium for Pacom we