Changes

* The result is commonly that acquisitions are substantially less profitable than the purchaser has anticipated. And when the previously discussed unanticipated geotechnical, process, and economic risks are factored in, the danger is doubled. Technical assessors must never forget that the central goal is to make a sound profit on the purchase. The appropriate mind set to operate from is, ''“If we cannot acquire this property at our price, we do not want it!”''

* The result is commonly that acquisitions are substantially less profitable than the purchaser has anticipated. And when the previously discussed unanticipated geotechnical, process, and economic risks are factored in, the danger is doubled. Technical assessors must never forget that the central goal is to make a sound profit on the purchase. The appropriate mind set to operate from is, ''“If we cannot acquire this property at our price, we do not want it!”''

How can the prudent purchaser guard against overbidding? Megill<ref name=pt02r11 /> shows that the average overbid in offshore continental shelf sales is about twice the size of the second bid, suggesting that a 50% reduction of calculated expected present value is an appropriate reduction. (Here it is important to note that the term ''expected present value'' as used here includes all geotechnical costs, but ''not the purchase price'', which is what we are attempting to fix.) Capen et al.<ref name=pt02r2 />) go farther, suggesting that for exploratory ventures having great uncertainty, sealed bonus bids should be reduced to 35% to 20% of expected present value, depending on the anticipated numbers of participants.

How can the prudent purchaser guard against overbidding? Megill<ref name=pt02r11 /> shows that the average overbid in offshore continental shelf sales is about twice the size of the second bid, suggesting that a 50% reduction of calculated expected present value is an appropriate reduction. (Here it is important to note that the term ''expected present value'' as used here includes all geotechnical costs, but ''not the purchase price'', which is what we are attempting to fix.) Capen et al.<ref name=pt02r2 /> go farther, suggesting that for exploratory ventures having great uncertainty, sealed bonus bids should be reduced to 35% to 20% of expected present value, depending on the anticipated numbers of participants.

However, less uncertainty ordinarily attends producing properties, so perhaps such sealed bids could be reduced by 25% to 50%. Table 1 shows sample calculations and company bid levels determined by two methods: (1) a 50% reduction of the expected value (not including bid) versus (2) conventional procedures utilizing present values at artificially elevated discount rates, as described at the beginning of this chapter.

However, less uncertainty ordinarily attends producing properties, so perhaps such sealed bids could be reduced by 25% to 50%. Table 1 shows sample calculations and company bid levels determined by two methods: (1) a 50% reduction of the expected value (not including bid) versus (2) conventional procedures utilizing present values at artificially elevated discount rates, as described at the beginning of this chapter.