Practical guidelines that incorporate financial and behavioral risk factors will be suggested to provide the acquisition team and decision-making team with tools to identify and eliminate bias in the determined value of an acquisition target.
Benefits & Impact Statement
The benefit to an oil and gas company will be to guard against the investment risk of overvaluation of future acquisition ventures which can erode the company’s value in the long term.
Intervention Question
The project seeks to answer the question “To what extend does bias in the valuation process affect the ultimate price and outcome of an acquisition?
Methodology
The objective of this research project is to provide a management tool for screening the risk of overvaluation in corporate oil and gas acquisition.
It is intended to conduct industry level research into the process of due diligence and valuation of targets with the aim of identifying methods or decisions-making processes that introduce the risk of overvaluation. The research will adopt a positivist approach and a hypothesis that behavioral factors contribute more to overvaluation of a target than the valuation method used will be tested for statistical correlation with deal value.
Data Sources
Primary Data
- A survey (questionnaire) of persons involved with oil and gas acquisition
Secondary Data - Publications on oil and gas acquisitions in the last decade.
Aspects of MBA Syllabus Used
The project will involve aspects of the core courses in Corporate Finance, Business Economics and the elective in Mergers and Acquisitions.
Literature Sources
The literature review will cover the motives and drivers of corporate oil and gas takeovers and the methods and approaches used in valuing and constructing acquisition deals. The relevance of appraising risk in the process of evaluating the acquisition target will be investigated. The potential sources of overvaluation risk will be investigated and the consequences on post-acquisition value discussed.
Indicative references:
Agarwal, N. & Kwan, P., 2017. Pricing Mergers & Acquisitions using agent-based
modeling. Economics, Management and Financial Markets, March, 12(1), pp. 55-67.
Bhimani, A., Ncube, M. & Sivabalan, P., 2015. Managing risk in mergers and
acquisitions activity: beyond ‘good’ and ‘bad’ management. Managerial Auditing Journal, 30(2), pp. 160-175.
Brotherson, W. T., Eades, K. M., Harris, R. S. & Higgins, R. C., 2014. Company
Valuation in Mergers and Acquisitions: How is Discounted Cash Flow Applied by Leading Practitioners?. Journal of Applied Finance, July, Volume 242, pp. 43-51.
Carlson, A. G., 2007. Due Diligence in Oil and Gas Acquisitions. s.l., LSU Law Digital
Commons.
Dong, M., Hirshleifer, D., Richardson, S. & Teoh, H. S., 2006. Does Investor
Misvaluation Drive the Takeover Market. The Journal of Finance, April, 61(2), pp. 725-762.
Kang, H.-G., Woo, W., Burton, R. M. & Mitchell, W., 2018. Constructing M&A valuation:
how do merger evaluation methods differ as uncertainty and controversy vary?. Journal of Organization Design, Volume 7.
Lee, J. & Prékopa, A., 2014. Decision-making from a risk assessment perspective for
Corporate Mergers and Acquisitions. Computational Management Science, October.12(2).
Marquardt, C. & Zur, E., 2015. The Role of Accounting Quality in the M&A Market.
Management Science, March.61(3).
Martin, R. L., 2016. M&A: The One Thing You Need to Get Right. Harvard Business
Review, June.pp. 42-48.
Martin, R. L. & Kemper, A., 2015. The Overvaluation Trap. Harvrd Business Review,
pp. 102-109.
McNichols, M. F., McNichols, M. F., Stubben, S. R. & Stubben, S. R., 2015. The effect
of target-firm accounting quality on valuation in acquisitions. Review of Accounting Studies, March, 20(1), pp. 110-140.
Mcnichols, M. F. & Stubben, S. R., 2015. The effect of target-firm accounting quality
on valuation in acquisitions. Review of Accounting Studies, March, 20(1), pp. 110-140.
Mukherjee, T. K., Kiymaz, H. & Baker, K. H., 2004. Merger Motives and Target
Valuation: A Survey of Evidence from CFOs. Journal of Applied Finance, pp. 7-24.
Ng, A. & Cox, R. A. K., 2016. Corporate takeovers in the US oil and gas sector. Journal
of Economic and Financial Studies, February, 4(2), pp. 23-34.
Patschureck, N., Sommer, F. & Wöhrmann, A., 2015. Contract design as a risk
management tool in corporate acquisitions: theoretical foundation and empirical evidence. Journal of Management Control, October.26(4).
Rudenno, V. M., 2012. The Mining Valuation Handbook. 4th ed. s.l.:John Wiley and
Sons Australia Limited.
Smit, H. & Lovallo, D., 2014. Creating More Accurate Acquisition Valuations. MITSloan
Management Review, 56(1), pp. 63-71.
Sudarsanam, S., 2010. Creating Value From Mergers and Acquisitions. 2nd ed.
Harlow: Pearson Education.
Weber, M., Zu Knyphausen-Aufseß, D. & Schweizer, L., 2019. Improving the M&A
Decision-Making Process: Learning from Serial Acquirers. Business Review, August.71(3).
Proposed Chapter Headings and Sub-Headings
- Introduction
1.1 Corporate oil and gas acquisition in 2010 – 2020
1.2 Drivers and motives for oil and gas acquisitions - Due diligence and valuation in oil and gas acquisition 2.1 Corporate valuation
2.2 Valuation of exploration and production asset
2.3 Overvaluation as a risk - Investigating overvaluation in oil and gas acquisition 3.1 The research question
3.2 Research methodology
3.3 Description of data
3.4 Identifying overvaluation risk - Conclusions 4.1 Discussion of findings
4.2 Recommendations - Appendices and Bibliography