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Royal Dutch and Shell

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Background. Royal Dutch Shell Group is one of the world’s largest oil corporations and one of the largest companies in Europe. The company was created as a result of a merge between Netherlands’ Royal Dutch and UK’s Shell Corporation. The case looks at the issue of price differentials between several equity listings in different markets from the perspective of investors seeking an arbitrage opportunity. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative price moves positively with the Netherlands and U.S. markets and negatively with the U.K. market. Structure. The Royal Dutch and Shell Group’s structure …show more content…

For a private investor there would be no difference in the tax treatment between the two investment opportunities. However, pension funds have different tax treatments in each jurisdiction depending on whether the investor bought Royal Dutch or Shell. In Exhibit 8 of the case study, Royal Dutch was trading for $141.368 in Europe and $141.375 in New York (a 7 cent differential). Shell was trading for $124.222 in Europe and $126.554 in New York (a $2.332 differential). These price differences exist due to market inefficiencies; however, these differences are small. As shown in the last column of Exhibit 11, these calculations render small estimates of the impact of these discrepancies. The percentage would be approximately 1% of the company valuation. The impact of these differences is calculated with the following formula: Avg. dividend for the group x Difference in tax treatment for the two entities. Arbitrage. In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. In this case, there is an opportunity for arbitrage. One arbitrage transaction that could be utilized would be a buy / sell transaction. An investor could liquidate his holdings of Royal Dutch and

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