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MW Petroleum Corporation (A) finance - Case Study Example
Amoco’s strategy is to rationalize its operations by shedding assets that are not contributing significantly to the company’s gross margin. This is reasonable as both the direct costs and overhead cots are high. The company is very large and the management appears unable to manage the operations as they are right now. …
Apache on the other hand is seeking to grow. This is a good opportunity for the company to do so. This transaction would be beneficial to Apache the portion of MW Petroleum that Apache is considering is located in the same general area where the company currently operates and so consolidation will further reduce costs. This should allow for increased economies of scale in the form of reduced direct operating costs and even more so overhead costs for Apache. It is cheaper for Apache to buy an existing business as it has been doing rather than carry out exploratory drilling. This acquisition will also allow the company to diversify geographically its portfolio of assets which is important when the riskiness of the operations is considered. This diversification will somewhat help to stabilize Apache’s earnings even though both gas and oil prices are highly volatile. The acquisition of Amoco will also enhance Apache’s standing among US independents and lead to even further acquisition opportunities. The company is considering further growth opportunities in the future and this represents a stepping stone that will allow Apache some amount of bargaining power and would therefore put the company in a better position to compete with other companies.
It is reasonable to expect that the MV properties are more valuable to Apache than to Amoco because Apache will benefit from synergies and rationalization of expenses. ...