United States Steel and Marathon Oil |
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In October 1981 Mobil Corporation announced a tender offer to buy up to 40 million shares of Marathon Oil Company common stock at a price of $85 per share. Marathon had approximately 59 million shares outstanding at the time, which had traded the day before the offer at a price of $64. Mobil’s offer stated that if more than 30 million shares were tendered, Mobil planned to acquire the remaining outstanding shares through merger, with the remaining shareholders receiving debentures (bonds) in exchange for their shares.
Marathon’s board of directors opposed the Mobil offer, deeming it “ grossly inadequate.” The board hired First Boston Company to appraise Marathon’s net assets (assets less liabilities). The appraisal, including good-will, estimated the value at $11-$13 billion. Marathon also initiated a court action claiming that a Mobil-Marathon combination would lessen competition in the industry, a claim that was upheld in courts.
With Marathon’s support, on November 18, 1981, United States Steel Corporation (USS) made a tender offer for 30 million Marathon shares at $125 per share. The USS offer also contemplated acquiring remaining outstanding shares with debt if at least 30 million shares were tendered initially. The following week, Mobil increased its original offer to $126 per share. The board again rejected Mobil’s offer, as well as one from Gulf Oil Corporation, on the basis that attempted merger with either oil company would be squelched on anti-trust grounds. The board instead supported the USS offer. Enough shares were tendered to USS that it gained 51 percent control of Marathon. Marathon’s fees to lawyers and investment bankers in fending off the Mobil offer and consummating the merger with USS were $38 million.
The information below was contained in a proxy statement to Marathon shareholders explaining the proposed merger. When consummated, the merger would be accounted for using the purchase method. Exhibit 1 shows income statements for USS and Marathon Oil for the year ended December 31, 1981. Exhibit 2 shows condensed balance sheets for the two firms as of December 31, 1981. . . .
Assignment
- Using the information given, prepare adjusting entries to the individual company 1981 financial statements and use these entries to prepare a pro forma consolidated balance sheet as of December 31, 1981, and a pro forma consolidated income statement for the year ended December 31, 1981, assuming the purchase had been consummated on January 1, 1981.
- Be prepared to describe how you determined the amount of good-will for the pro forma 1981 year-end consolidated balance sheet.
- If one divides each company’s 1981 net income, as shown in Exhibit 1, by its respective number of outstanding shares, shown in Exhibit 2, the results are not the $12.07 and $5.82 shown in Exhibit 1. What could account for the apparent discrepancy?
- Approximately what would have been the consolidated 1981 primary earnings per share had the purchase been consummated on January 1, 1981?
- Calculate the following ratios for USS (without Marathon consolidated) for 1981: profit margin, current ratio, acid-test ratio, long-term debt/equity, times interest earned, return on equity (= net income/owner’s equity).
- Repeat the ratio calculations, based on your pro forma 1981 consolidated statements. What does a comparison of these two sets of ratios suggest about the short-run benefits to USS’s shareholders arising from the purchase of Marathon?
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