Cash Burning a Hole in the Pocket

Last week Woodside Petroleum (WPL) submitted an offer to acquire Oil Search (OSH). This hostile bid had a range of conditions (such as approval by the PNG Government) and is to acquire all of the shares in Oil Search for a consideration of 1 WPL share for every 4 OSH shares. This announcement proved to be positive for OSH shareholders who saw an immediate +17% jump in the company’s share price and enjoyed speculation in the press that higher bids would be coming down the pipeline. Woodside Petroleum’s shareholders were less happy as the stock was immediately sold off -5%, as the market questioned the company’s financial discipline and whether this represents a transfer of value from the acquirer to the acquiree.

In this note we are going to look at the questions that Woodside’s board face with the billions of shareholders’ funds burning a hole in their back pocket. Historically we have observed that far too many companies have frittered away their excess cash or diluted existing shareholders by issuing new shares on questionable acquisitions designed to buy growth or move into new markets.

Read more here.

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