In April 2006, Houston-based Anadarko Petroleum Corp. was progressing as it had since 1986 when it was spun out of Panhandle Energy as a North American E&P company. When Jim Hackett joined the company as chief executive in December 2003, he began an asset-rationalization program that took place in June 2004 with the goal of optimizing the company's asset footprint to refocus on areas best suited to core skills and talents.

By early 2006, Hackett and team, including Al Richey, vice president, corporate development, began thinking growth and rationalization thoughts again.

"Jim had a vision to expand on our strengths and experience to move the company forward," Richey says. "We had a leading position in the deepwater Gulf of Mexico, from which we could grow, and we wanted to balance that with an enhanced position in the Rocky Mountains."

Anadarko's last large-scale purchase was of fellow independent Union Pacific Resources in 2000. Management decided the best way to grow in the deepwater Gulf and in the Rockies was to buy. They came up with a list of three attractive companies, including Oklahoma City-based Kerr-McGee Corp. and Denver-based Western Gas Resources Inc.

Kerr-McGee was considered a pioneer in the deepwater Gulf of Mexico and also had dominant positions in the Denver-Julesburg Basin of northeastern Colorado and the Uinta Basin in eastern Utah. Western Gas Resources had strong positions in the Powder River and Green River basins in Wyoming.

"We thought any one of the three would be great, but in the end we decided to focus on Kerr-McGee and Western Gas," Richey says. "The more we looked into these two companies, the more we liked both of them. We expected to end up pursuing one, but not both.

"However, as we got deeper into the analysis, our chief financial officer, Al Walker, believed it was possible that we could buy both to accelerate execution of our strategy."

With that thought in mind, Anadarko knew speed and discretion were essential. If it were to have a chance at buying both, it had to act quickly and quietly. Neither company knew Anadarko was talking to the other.

"In the background we were doing lots of valuation analysis and could see a compelling story for each company," says Katie Jackson, vice president, corporate acquisitions and divestitures. "We could see a lot of upside from where the share prices for both companies were trading."

As Anadarko became increasingly enamored with the prospect of buying both companies and talks with each progressed, the need for discretion increased.

"We had a very limited deal team," Richey says. "We tried to keep it to 10 to 12 people who knew. We had code names that we changed pretty frequently, but these ultimately became known as Mallard and Merlot."

As talks progressed, it became apparent that Anadarko might be able to announce both acquisitions simultaneously. Initially, the purchase of Western Gas moved faster than that of Kerr-McGee, but the Kerr-McGee deal process gained ground later. The legal counsel for the deal, Akin Gump Strauss Hauer & Feld LLP, decided it was easier from a legal perspective for the acquisitions to be done simultaneously, as well.

"We advised Anadarko that if they were indeed going to pursue both transactions, they really needed to do them simultaneously because it would be very difficult to sign up one deal, announce it, and then announce another one several days later," says Michael Dillard, a corporate attorney with Akin Gump.

"There would obviously be a lot of questions in connection with the first deal about what other plans Anadarko had."

Funding the deals was a matter of timing as well. In the end, Anadarko paid $22.5 billion in cash for both Kerr-McGee and Western Gas, all funded from a short-term credit facility from UBS, Citigroup and Credit Suisse.

"We needed confidentiality and we wanted it to be a quick process, so offering cash was an important solution," Richey says. "If we would have tried to offer equity, there would have been two sets of evaluations. The counterparties would have to have been evaluating our stock at the same time we were evaluating theirs and it would have been a much more complicated process, especially with the two deals happening simultaneously.

"Ultimately, people understand cash very well. If we offer to give them all cash, no strings attached, a successful deal comes down to purely whether they like the price or not."

With a limited deal team, a CEO who was flying back and forth between Denver and Oklahoma City courting two companies at the same time, and $22.5 billion worth of cash, Anadarko did the impossible: it agreed to purchase two large, publicly traded companies on the same day, completely shocking investors, and it achieved this in a mere 37 days.

"Goldman Sachs told us as far as they knew there had never been a simultaneous double-merger like this of public companies," Richey says. "It caught the Street by surprise that we were able to do two at a time, when a lot of people didn't see us as a buyer. Jim Hackett had a vision of where he wanted to go, and our strategy is working as we continue to recognize additional value in these assets."

The market's initial reaction to Anadarko's announcement was negative, a mood illustrated by the drop of Anadarko's stock price after the acquisitions were made public.

Despite the initial skepticism in the market, there was a lot of enthusiasm in Anadarko's Houston office on August 23, 2006, when the acquisitions were completed. The company knew it had purchased two great companies with world-class assets in record time.

"We did the economics on buying both companies with pretty conservative pricing and low-case scenarios, and we identified a lot of value by virtue of the net risked unbooked resource potential," Richey says.

"This was clearly a good deal for us. It was an opportunity to buy two companies with assets we thought would help us to execute our corporate strategy. We were willing to do it with cash and we were comfortable with the commodity prices inherent in the purchases."

Taking on more than $20 billion in debt is enough to make any investor nervous. However, Anadarko had a plan for putting Wall Street at ease with its debt-reduction strategy and with the properties it purchased. It hedged about 75% of the acquired production for two years, despite the fact that the company does not tend to hedge, preferring instead to participate in market upside.

The divesture plan would bring in up to $15 billion after taxes to help Anadarko repay the debt and the company announced it would consider issuing equity, if needed, to complete the task.

The first sale Anadarko announced was of its Canadian subsidiary, Anadarko Canada. The sale set the Canadian market abuzz.

"Until we closed the acquisitions in August, we couldn't sell any of the target-company assets, so we began our divestment process with assets we already owned," Richey says. "Canada had been a very active market, and it appeared to us to be a seller's market, so we thought it was a good time to sell.

"It was also the first big property like that up there to be sold in some time, and we thought the royalty trusts were going to be very excited about that. We accepted an attractive preemptive offer from Canadian Natural Resources."

Upon incorporating the Kerr-McGee and Western Gas properties, Anadarko high-graded its portfolio. To date, the company expects to receive approximately $9.6 billion in after-tax proceeds from announced divestitures. It has accomplished this ahead of schedule and the value has been at the high end of expectations.

"We've achieved about two-thirds of our targeted divestment proceeds already, through nine sequential sales," Richey says. "We're extremely pleased with the value and the timing achieved to date and anticipate success in selling the remaining properties."

Left to be sold are Anadarko's position in Venezuela, part of its position in Qatar, and some of its assets in the U.S. Austin Chalk. This is not Anadarko's first rationalization process, so the market realizes the quality of the properties that are being marketed, Richey adds.

"We would like to generate proceeds of up to $15 billion in cash, and based on the quality of these assets, people realize this is not a fire sale. That's helped us generate strong prices for these properties. We're selling quality assets because we need to pay down debt, and you're probably not going to see assets of this quality in such large packages on the market again, so people are jumping at it."

The new Anadarko will continue to focus in the Rockies and the deepwater Gulf. Additional focus areas will be the domestic U.S., including Alaska, East Texas, the Hugoton Basin and southwestern Texas. Internationally, its positions in Algeria, offshore Brazil, Bohai Bay, China, and Indonesia are high priorities.

"Through these acquisitions, we're creating a company that has enormous potential," said Richey. "We've already identified more than 7 billion barrels of oil equivalent in captured upside. We are poised to add reserves of at least 200 million barrels of oil equivalent through just our development operations in 2007, leaving additional potential from exploration success in the future.

"And we have some great projects in the pipeline, with the start-up of Independence Hub (in the deepwater Gulf) toward the middle of this year, the Peregrino Field offshore Brazil and major discoveries in the deepwater Gulf. The acquisitions and optimization process have lowered our risk profile and increased predictability and consistency."

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