CHAPTER 1 BUSINESS OVERVIEW OF A SALE TRANSACTION
| Jurisdiction | United States |
(May 2006)
BUSINESS OVERVIEW OF A SALE TRANSACTION
J. M. Huber Corporation
Houston, Texas
Jane Fleck Romanov
Bale & Godkin, LLP
Sugar Land, Texas
W. PAUL LOYD
W. Paul Loyd joined J.M. Huber Corporation in 1982 and is currently Director of Business Development for Huber Energy. During his career with Huber, he has participated in the sale or acquisition of approximately $1 billion of assets.
Paul earned his B.B.A. and J.D. from the University of Houston, and is a Fellow of the College of the State Bar of Texas.
JANE FLECK ROMANOV
Jane is a partner with the law firm of Bale & Godkin, LLP in Sugar Land, Texas, where she practices oil and gas law focusing primarily on acquisitions and divestitures and E&P matters. Jane has over 20 years of experience working in a variety of arenas in the energy business, including international project development, power plant development, and finance.
Table of Contents
ARTICLE 1 INTRODUCTION
1.1 Scope of Paper
ARTICLE 2 DECIDING TO SELL
2.1 The Process
ARTICLE 3 INVISIBLE TRAPS
3.1 Trip Wires
3.2 Specific Traps
ARTICLE 4 AVOIDING THE TRAPS
4.1 Tools of Escape
4.2 Anchoring
4.3 Breaking Loose
4.4 The Corpse is Dead
4.5 The Confirming Evidence Trap
4.6 The Framing Trap
4.7 Overstating Reserves, Purchase Price; Being Overly Prudent and Too Influenced by Past or Current Events
ARTICLE 5 WHY SELL?
5.1 Assets to be sold
5.2 Achieving Maximum Value
5.3 Retaining Assets
ARTICLE 6 THE ADVISOR
6.1 Maximize Value
6.2 Getting Paid for the Upside
6.3 Sell by Analogy
6.4 Emphasize the Appeal
6.5 Paying for the Upside and Commodity Cycles; A Recipe for Disaster?
6.6 Identifying the Buyer
6.7 Data Room and Support Resources
6.8 Negotiations
ARTICLE 7 AUCTION
7.1 Seller Controlled
7.2 Added Value
7.3 Disadvantages to an Auction
7.4 A Successful Purchase and Sale
ARTICLE 8 THE NEGOTIATED SALE
8.1 Positive Aspects of a Negotiated Sale
8.2 Disadvantages of a Negotiated Sale
ARTICLE 9 CONFIDENTIALITY AGREEMENT AND COVENANTS NOT TO COMPETE
9.1 The Confidentiality Agreement
9.2 Non-Compete Provisions
ARTICLE 10 THE LETTER OF INTENT
10.1 Key Terms
10.2 Typical Seller LOI Terms
10.3 Buyer's View on the Terms of the LOI
10.4 Thorny Issue; When is an LOI Binding?
ARTICLE 11 IMPLEMENTATION
11.1 Project Leader and Team
11.2 Project Leader and Team Tasks
11.3 Seller Due Diligence
11.4 Preparing the Data Room
11.5 Post Closing Integration Plan
11.6 The Negotiation and Closing
ARTICLE 12 CONCLUSION
Acknowledgments
The authors gratefully acknowledge the contributions and assistance provided by Ken Olive, President and Chief Executive Officer of the Oil & Gas Asset Clearinghouse, a subsidiary of Tristone Capital, Inc., Joe Gladbach, Managing Director of Randall & Dewey, a Division of Jeffries & Company Inc., Marcus C. Rowland, Executive Vice President and Chief Financial Officer, Chesapeake Energy Corporation, Keith O. Rattie, Chairman, President and Chief Executive Officer, Questar Corporation, Joseph Dunning, Vice President-Mergers and Acquisitions, J. M. Huber Corporation, Cathy Zito, Legal Assistant, J. M. Huber Corporation, and Douglas Dubois, Associate, Bale & Godkin LLP.
ARTICLE 1 INTRODUCTION
1.1 Scope of Paper. The purpose of this paper is to discuss the decision-making process in the sale of oil and gas properties; identify tasks and issues associated with the implementation of the decision; address legal issues that may arise in preparing for a sale of assets;1 and provide a corporate insider view of the divestiture process with practical suggestions on what has worked and what has not.
ARTICLE 2 DECIDING TO SELL
2.1 The Process. Making a decision to sell oil and gas properties and their related assets is a function of a company's structure and its personality. Some companies' ability to decide to sell, and determine what assets to sell, may be constrained by seemingly impenetrable barriers of rules, policies, stone-engraved strategy and corporate temperament. Other companies foster a process that is robust and streamlined, purposely implementing methodologies and forming "knowledge-deep" acquisition and divestiture teams who may be deployed quickly and effectively when sale opportunities surface.
Traditionally, companies have been managed through a strategic planning process conducted annually. The plans include annual budgets and goals for the various business units, including acquisitions and divestitures, based on theoretical forecasts of how the company can grow, improve earnings and reduce costs. However, no matter how qualified those serving on the company's board of directors or the executive office are, none are clairvoyant.
A cumbersome corporate structure is a key cause of missed opportunities to divest assets, and divest assets successfully. Managers, inhibited by the bonds of the annual planning process, but wishing to function and decision make on a real time basis, circumvent the annual strategic plan and instead make ad hoc divestiture decisions.2 These "on the spot" decisions are fraught with risk and potential for failure.3 With neither the time to wait for calendared approval processes or to adequately assess the incredible but unpredicted opportunity, decisions are often being made without (a) detailed analysis; (b) input from cross discipline corporate areas of expertise, and (c) any dynamic challenge by management.4
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The consequences of ad hoc decision are:
(a) sloppy pre-sale due diligence;
(b) a purchase price that has not been maximized;
(c) inadvertent provision of critical, yet, incorrect information not only to the buyer but to management as well;
(d) the inability or insufficient time to ensure that management has reasonable expectations of the economic benefit of the deal, and perhaps worse;
(e) the creation of dissonance between management and the business units.
The end result--the post mortem and proverbial search for the guilty, persecution of the innocent and the death spiral of employee morale.
Despite these risks, studies indicate that a majority of companies surveyed do in fact ignore the annual plan in order to take advantage, albeit rashly, of real time opportunities.5
More insightful companies function through an annual plan and capital allocation system, but intentionally devise a broad and flexible strategy that recognizes that the future is unpredictable and that reactionary decision-making in a vacuum is perilous.6 This strategic structure permits a company's acquisition and divestiture team to take advantage of opportunities that are a right fit for the company, but which may require a re-arrangement of calendared priorities and human resources.7 In the case of an acquisition, this same company is geared to reallocate capital, or use its balance sheet for a strategic purchase, and quickly deploy its acquisition8 and divestiture team.9
Another strategy is emerging to rectify the inefficiencies of annual planning and ad hoc decisions. Corporations on the edge and profitable have abandoned the traditional strategic planning decision-making process to focus instead "explicitly on reaching decisions through the continuous identification and systematic resolution of strategic issues".10 Although the changes have not been without their headaches, companies report great successes.11
Continuous planning and identification of opportunities can only positively impact the value of a company and its assets. The steady and constant decision-making and planning process improves communication between the business unit managers and the executive office with the result of greater growth and increased profits. In fact, it is these types of
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efficiencies enabling an acquisition or divestiture team to move quickly and effectively without the traditional strategic planning and decision-making procedures bogging them down that has played a role in the success story of Chesapeake Energy Corporation.12
In similar manner the implementation by Questar Corporation of an annual but intentionally flexible planning program, has permitted the company to grow profitably by taking advantage of unexpected strategic acquisitions identified by a solid acquisition and divestiture team that is continually examining the market.13
ARTICLE 3 INVISIBLE TRAPS
3.1 Trip Wires. Even with the most streamlined decision-making process, it is unlikely that there will ever be a faultless sale or acquisition. Bad decisions, however, are not always attributable to the process, failure of communication or ignorance of material issues and stumbling blocks. Sometimes, we the decision makers and the team members are the problem, unknowingly triggering trip wires or falling into are own traps in the course of a divestiture. These trip wires can be avoided.
3.2 Specific Traps. Eight traps have been identified that can affect and sabotage how business decisions are made and implemented:14
(a) Anchoring, unconsciously giving disproportionate weight to first impressions, data, estimates or information received;15
(b) Reluctance to change the status quo even if better alternatives exist;16
(c) Perpetuating past mistakes due to sunk costs--throwing good money after bad;17
(d) "Confirming-evidence trap [leading decisionmakers] to seek information supporting an existing predilection and to discount opposing information";18
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(e) Framing trap--misstating a problem and allowing the entire decision making process to be undermined;19
(f) Overconfidence leading to overestimation of forecasts;20
(g) Overly prudent resulting in being too cautious when risking uncertainty;21 and
(h) "Recallability trap", causing the decision maker to give undue weight to current and dramatic events.22
A couple of more traps which have been the bane of many companies can be added to the list. One trap is the consequence of human...
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