Analyzing the Pickens and Unocal Tender Offers: Maximizing Shareholder Value

1. Assume the two offers described in the case, i.e. Pickens’ tender offer for 64M shares and the Unocal exchange offer for 87M, went forward as planned. If you  were a public shareholder in Unocal and participated in both offers, what value  per share would you have gotten for you shares? What residual ownership in Unocal would you have ended up with after both offers close? 

2. As a Unocal shareholder, using the assumptions & calculations taken from the  first question above, you would have

Step 1: Tendered your shares into the  Pickens’ offer

Step 2: Received $54 for your pro rata portion of shares purchased  in the tender offer, with the rest of your tendered shares returned by Pickens

Step 3: Taken the shares returned by Pickens and tendered them into the Unocal  exchange offer

Step 4: Teceived $72 for the shares tendered in that  exchange offer. Was there a better strategy than that to maximize the value you  might receive for your shares? 

If the agreement went as originally planned, all shareholders would definitely receive roughly similar deal per share under current stock buyback offer. Unocal offer what is known as a self-tender for its own stock with a reasonable share price of about $72 (Brain, 2013). The cost of the proposal culminates in more debts for the company. This would imply that Unocal in effect exchange about $72 worth of debt securities for a section of the Pickens’s offer. If the shares are valued at the current market price, the overall value of investments made by Mesa would culminate to about $1-$2 per share less than the average cost which incorporate financing and legal expenses. According to the case, the exchange offer appears oversubscribed and it is important to note that a preliminary count of the submitted shares shows that the proportion would most likely be 38.4%. This implies that every eligible shareholder would receive about $72 for every share of debt securities for 38.4% of the total shares submitted for offer inclusion.

After the offer close and the buyout is completed, my residual ownership will be the cash value of my shares in Unocal. After the takeover, the shares of the shareholders definitely disappears from their portfolio within a certain period  following the official closing date and be replaced with cash value of the shares defined in the buyout. The deal involves a two-tier front loaded cash tender of about 64 M shares and an outstanding stock of Unocal valued at a price of $54 for every share. The back end of the deal implies elimination of publicly held shares through security exchange worth $54 for every share. In this context, all shareholders would definitely receive roughly similar deal per share under current stock buyback offer.

To maximize the value of shares for the company’s shareholders, it is important to use strategies that minimizes unnecessary expenses and increases cash flow for the company. The best strategy is to review annual or monthly expense reports with a motive of determining expenses that can be reduced or completely eliminated without adversely affecting operations of the company. When the company’s overhead costs goes down, it is likely that more profits will be produced for every revenue earned thus increasing the value of shares. As to the rules that govern exchange offers, while there are some differences in using securities versus cash, in most respects the same rules apply as in the case of a cash tender offer.  I should mention that at some point Unocal followed up with a second $72 exchange offer for only. Therefore, I will focus on strategies that increases company’s cash flow and significantly eliminate those that reduce the cash flow of the company.

Reference

Brain, Q. (2013). Unocal Corporation and Mesa Petroleum Co. Business Journal, 12-23.