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The module assignment is based on the material covered in the Corporate Finance elective, which in turn builds on the knowledge acquired in the Business and Financial Environment module.

The assignment requires you to analyse the case of a proposed merger between the Repsol and YPF Company. Given the data provided in the case study, you should write a report to discuss and explain the following issues:

1. An analysis of the strategic position of the two companies before the acquisition, their alternative strategic options and the rationale for the acquisition.

2. What YPF is worth as an independent company and what is its potential value if it is acquired by Repsol? On that basis what is the reasonable price that Repsol should offer to acquire YPF and should Repsol pay for the acquisition by offering cash, stock or a mix method of payment?

3.  What are the key factors that might affect the level of success of the proposed acquisition and the prospects as well as the threats of the proposed deal?

Repsol and YPF - Overview

In this assignment, the merger of two most prominent entities in the oil and gas exploration sector will be studied along with consequences of the same. The companies are Repsol and YPF that are leading entities in this sector. Analaysis of the overall prospects of the merger along with results will be done. Mergers and Accquisitions are one of the major business restructuring program that is undertaken by companies to enjoy synergies and pool in their resources to get the best financial results possible.

Repsol was one of the largest oil company in Spain and had the largest share in this industry. The company had some massive expansion going on and was on a spree of acquiring units that might help it to improve its position in the market. Before acquiring YPF, the overall business of Repsol was divided into four main categories – E&P, Refining, Marketing, Petrochemicals, gas and electricity. The company was highly functional in Spain but on the international front, the company was not that highly operational. To improve this the company then decided to invest in Latin America and this is when the company decided to invest in YPF which was highly functional in that region (Abbott & Kantor, 2017).

The overall strategy of the company before taking in consideration the merger of YPF was –

  • Expansion in major areas that included North America, Europe and Latin America. This will help the company to get a global exposure and will also make in strong internationally.
  • The company also aimed to make use of the synergies of scale that big companies generate when they go for merger and acquisition(Alexander, 2016).
  • The company wanted to make its position in the Spanish market more firm and strong and this was a policy that the company had followed since its inception. It was good initially but later in the long run it was not good for the company.
  • The company also aimed to enter other sectors of exploration and production, so that there is an increased economy of scale and the company is able to generate profit from other sector also.

The overall financials of the company from the time that it started its operation has always been on an upward approach and there has been tremendous growth in all sectors except crude oil. The company was an oil-based company with no major presence in the oil sector.  Between 1997 and 1998 there has been a tremendous decrease in the price of the crude oil and that affected the overall economies of the European companies, but Repsol was able to maintain its status as the company had tremendous growth in other sector and thus was able to maintain its economies of scale. The company had a relatively limited exposure to the crude oil exploration and development and thus the company was not affected by the drop in the prices of the crude oil (Birt, et al., 2017). But later through years, the company wanted to improve its stand in this sector and thus decided to invest in the YPF.

YPF was the dominant power in the oil exploration sector with more than 68 percent of the total share in this field. As time passed the dominance of the company improved and it could improve its stand to 84 percent in this sector. The company was also one of the largest gas producers but as the market improved the company was unable to meet the demands of the growing sector and thus had to suffer a lot because of the same. In 1989 the company began the privatization process as per which the company decided to go for restricting and sales and because of this more than 45 percent of the total shares of the company were floated in the market by the company (Burke & Clark, 2016). In 1999 the YPF was one of the largest integrated petrol company and one of the largest oil company in Argentina. The company had a significant stand in this field and thus the Repsol was ready to take over the stakes of the company and convert it into its own. The YPF had many refineries and oil exploration outlets and in case Repsol took over the same the company would have become a strong entity in this sector. Thus, both the companies were keen on the merger and wanted to take advantage of their individual economies of scale as this will help the company in attaining a dominant position in the oil sector

Strategies before Merger

There is a huge amount of competition in the oil sector and it is one of the highly economical sectors for the companies. Due to large-scale economic globalization, there have been many changes in the oil and gas industry. The companies are not only looking for improving their economies of scale but also want that there must be significant investment in this sector that will help in widespread growth and development of the same. The necessary point is that companies need to merge in this industry so that they can share their risk and costs and this will help in the development of the sector largely not only of the companies (Chariri, 2017). There have been many new mergers in this sector and that has helped in the development of many new companies. There are other groups in the sector also one that has medium-sized companies and other that have small-sized companies but these companies usually go for the domestic sector to finance their developments and are mostly trying to integrate the downstream activities in the oil exploration region. This is how the sector is functioning and going forward these mergers will help in the large term growth and development of all the companies.

In case of YPF and Repsol gave their current financial position both the companies are dominant in their sector and are contributing to the economy, in case they go for merger it will not only help in the development of the economy but as companies, they will also grow (Chiapello, 2017). The companies will be able to improve their position in the medium ranged dominant oil industry and with such a huge merged market capital, the companies will come equivalent to the other functioning companies in that region and that country. The strategies of the company before going for the merger included –

  • Extensive amount of expansion in countries like Argentina and China, that would help in strengthening the position in the oil and gas sector.
  • The company also opted for privatization under the lead Estenssoro, under few conditions of liberalization of the oil and gas prices, the deregulation of the overall sector, focus on the executives establishing direct business contacts and focusing on the overall growth scale more than the economies of scale

Thus, mergers in this sector are so much initiated and encouraged as it helps them to deal with the complexities of the oil industry and improve their position and helps them to curb the competition. There is abundance of resources and opportunities that are there in this industry owing to the large number of exploration zones and market that has opened. The companies need to maintain a certain growth rate that will make the existence of the company feasible in that zone (Crosby & Henneberry, 2016). Thus, for a company like Repsol that does not have high hold in this oil exploration sector and will not be able to compete with the huge oil companies that have been formed in the recent times, there are two possible options available-

  •    Buying such a company that is complementary to the operations of the company
  •    Being taken over by one or the big giant companies that are functional in that zone.

Competition in the Oil Sector

Thus, if the company mergers with YPF, the overall market cap of the company would be so huge that it would make it difficult for other companies to take over the same. Thus, this will help in improving the overall position of the companies and also help them to maintain the economies of scale. Thus, it will be better if Repsol mergers with YPF. Both the companies will gain from the same (Dichev, 2017).

Free cash flow is calculated by reducing the capital expenditure from the operating cash flow of the company. The operating cash flow consists of post tax EDBIT, plus the depreciation claimed less any kind of change in the working capital of the company. The same has been done in the above free cash flow calculation of YPF, all the figures are taken from the exhibits provided and calculation is done as per the formula.

The WACC is the weighted average cost of capital for any company. It included the overall financing cost of the company in the form of debts, equity and other instruments. In the above case, there are only two elements debt and equity. The post tax debt cost is calculated by reducing the rate of tax from the cost of debt. The cost of equity is calculated by the formula = Re = Rf + (Rm-Rf) *beta. Where Rm is the rate of market risk premium, Rf is the risk free rate of return, and Re is the cost of equity. The risk premium is reduced from the same, hence the WACC is calculated without considering the risk premium. The market risk premium, the asset beta is calculated on the basis of the overall prevailing rates in the market at present. The tax rate of 35% is calculated on the basis of the exhibit by dividing the tax deducted by the company by the net income of the company.

The terminal value will capture the present value of an entity post the forecast period in case of a discounted cash flow analysis. In the above case the growth rates have been atken into consideration to calculate the forecasted value of the cash flows and then same has been discounted with the WACC of Repsol to calculate the present value of the same.

The standalone valuation of YPF before merger is

Total number of shares * Market Price of the share.

Total number of shares = 353

Benefits of the Merger

Market price of the shares = 41.85

Therefore, standalone value of the shares of YPF = 14773.05

In case the company is acquired to Repsol the proposed value of the company would be –

Market price of the merged company = 17.92

Total share of the company = 900

On this basis we see that the overall market price of the company as a merged entity is more then what was as a standalone company. But the market price of the shares of the standalone company was more than that of the merged company. So, based on the same it can be said that it would be better if the company pays in share in some part and some part in cash (Sweeting, 2017). This will help in stabilizing the position of the company and since the standalone price is so high, if the company pays only in shares it will cause the company huge amount of money. The cash only offers has a lot of advantageous as it will be attractive for the shareholders of the company. But it has also its share of disadvantage as it might end up increasing the overall cost of debt of the company. Thus, it might be said that part cash and part share method would be more helpful as it would help in ascertaining a stability (Fay & Negangard, 2017).

The overall synergy from the merger can be calculated by reducing the value of the individual companies from the merged entity and that would help in judging whether the company has earned the required amount of profit. If there is only share based payment then that might lead to a negative impact as we see that pre- acquisition share price of YPF is very high in comparison to the merged company. Hence it would be better if the companies could regulate the same, as shareholders won’t be encouraged enough to go for such mergers where they are paid only in shares.

Exposure to International market – Previously Repsol was highly functional only in Spain, but after merging with YPF the company will have improve international presence with YPF being highly functional in Latin America. The focus on Spain was responsible for the initial growth of the company but later this became a big weakness for the company, as the overall growth became stagnant. Thus, the company initiated its exposure to Latin America and once the company gets merged with YPF the overall exposure of Repsol will improve five times then the current position in the industry. The company would get an opportunity to be exposed to a new growth axis and that in times to come will make it economically more feasible (Prasad & Chand, 2017).

Valuation of YPF

Integration of the gas chain – The overall position of the Repsol would make it the biggest in the industry given the hold of YPF in this sector. The company has a low gas structure and high productivity and that has made the overall business of the company very profitable. And in times to come, the company can introduce the same strategy in case of YPF, the overall business of the company will increase. Both the companies have operations in this sector but there is certain amount of imbalance that can be set off from this merger (Han, et al., 2017). It would help in improving the overall regional efficiency of both the companies. The overall sector will go given the strong presence of both the companies and merging of their capabilities.

Leadership in Domestic Market – This merger will not only help the companies on an international front, but will help in attaining a strong position in the domestic market also. It would help Repsol to have a strong effect on the Argentinian market and will strengthen its position in Peru and will add to its existing leadership in Spain. This leadership will help the company in fighting tough competition it faces from other top players in the industry. Thus we see that not only the companies but the sector will also grow as it will help in bringing uniformity in the operations and bring stability in the market (Guragai, et al., 2017).

Growth in Exploration and Oil Production- The merger of the two companies will help in forming a more stronger company that can effectively deal with the complexities that the oil market must deal with. It will help in increasing the operating profit of the company to more than 50 percent from the current position. Both the companies have been in this business from a long time and have certain strengths that would help in making the overall business very profitable for the company. Thus, not only the companies the overall sector will benefit from the same as the merger is based on a growth concept and that will help in improving the overall economies of scale for them. It will also help in improving the production of electricity by Repsol. The company has initially planned to invest certain amount of resources in the production of electricity but with the purchase of YPF the investment plan was increased to more than 50 percent of the total plan (Maynard, 2017). That will help in improvement of the company in other sectors also.

Cash versus Share Payment

Thus, if we summarize the overall factors that would help in the growth of the two companies post the merger are –

  • International merger will help the companies face stiff competition and help them in improving their position on a global front.
  • It will help both the companies to make economical use of each of their resources and pool it to get the best desired results.’
  • It will help them in improving their current growth positions and make it economical not only from the growth front as a merged entity but also as individual companies thriving to secure their position in their domestic market.
  • It will help the companies to try their hands in other sectors also like gas and electricity and make it reasonable for them to pool their resources, share their complexities and invest economically in those sectors in which they want to. Thus, it will help in the development of the industry.
  • It can also be seen that both the entities are strong in their own way and holds huge amount of resources and experience of regulating areas and sector and thus if they merge they will pool in all these that will lead to a development of a strong entity. This will prevent them from takeover bids.
  • It will also be economical for the employees and the people who have invested in the company as they will get increased returns on their money. This will also help in making the position of the company strong both economically and financially.

The risk factors that are involved in the proposed deal-

  • There may be a situation where the shareholders and the minority party do not get their dues as when the company mergers they might be undervalued. So, this is one of the major risk factors that is involved in this merger. The shareholders must get their dues even if they do not want to be a part of the merger taking place.
  • The merger would increase the position of the company in the oil and gas exploration sector, but previously the price of crude oils was not affecting the position of Repsol but with this merger any fall in the price of the crude oil will affect the company. The company is having huge stake in this sector as of now. Thus, this is where the risk element is high as it will make the share price of the company in a very unstable position. Thus, the company needs to consider this matter so that the fall in prices do not affect the position of the share prices of the company(Given, 2016).
  • The point of concern is also the manager of Repsol that was hugely responsible for the turnaround of the company in the domestic sector. If the merger is initiated it may be possible that the manager might lose its stake in the entity. Thus the risk is involved with respect to the resources that the company had previous to merger and the ones that it would carry forward to the merged entity.
  • The other point of risk was deciding how would the company finance the overall bid and what way would be the most economical given the market rate, the rate of return that the shareholders expect and the price that would not be any loss for the company and the shareholder. For this an overall analysis of the present market was needed so that the company would be on a profitable side with respect to its shareholders(Chariri, 2017). The takeover bid might affect the overall capital structure of Repsol and that won’t be good for the company in the long run. It was thus needed to understand whether the new company would be able to finance this merger profitably, so that in the long run it is having no negative impact on the financials of the company.


Hence on the basis of the above analysis it can be said that merger will be helpful as it will help both the companies to improve their position in the international market and also on the domestic front. It would also help in the development of the industry as two big entities will merge and thus the overall growth prospects would improve. Thus it would be helpful in the long run for both YPF and Repsol if they merge with each other. The company should keep in mind the needs of the stakeholders before taking any decisions in this regard. Only if the merger is fruitful economically and bring viability to present status of the company, it should be adopted. These kind of arrangements have their own share of pros and cons and that needs to be weighed before taking any decision.


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Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Birt, J., Muthusamy, K. & Bir, P., 2017. "XBRL and the qualitative characteristics of useful financial information". Accounting Research Journal, 30(1), pp. 107-126.

Burke, J. & Clark, C., 2016. The business case for integrated reporting: Insights from leading practitioners, regulators, and academics. Business Horizons, 59(3), pp. 273-283.


Chiapello, E., 2017. Critical accounting research and neoliberalism. Critical Perspectives on Accounting, Volume 43, pp. 47-64.

Crosby, N. & Henneberry, J., 2016. Financialisation, the valuation of investment property and the urban built environment in the UK. Urban Studies, 53(7).

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Han, B., Subrahmanyam, A. & Zhou, Y., 2017. The term structure of credit spreads, firm fundamentals, and expected stock returns. Journal of Financial Economics, 24(1), pp. 147-171.

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Sweeting, P., 2017. Financial Enterprise Risk Management. Second ed. UK: Cambridge University Press.

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