The Exxon - Mobil Merger Controversy
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Case Code: BSTR117 Case Length: 21 Pages Period: 1998-2003 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.500 Organization: ExxonMobil Industry: Oil and Energy Countries: USA Themes: Mergers Acquisition and Takeovers |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
The Merger
Under the terms of the merger, approximately 1 bn shares of ExxonMobil were issued in exchange for all outstanding shares of Mobil, based on a swap ratio of 1.32015. After the merger, the shareholders of Exxon owned approximately 70 per cent of the merged entity, while Mobil shareholders owned the remaining 30 per cent. Each outstanding share of Mobil's preferred stock was converted into one share of ExxonMobil preferred stock. For the nine month period ending September 30, 1999, the merged entity reported revenues of $130.95 bn and a net income of $5.63 bn. ExxonMobil owned 21 bn barrels of proven oil reserves and its equivalent in natural gas, about 1% of the worldwide total. A near term operating synergy of $2.8 bn was expected...
The Merger Rationale
Many reasons lay behind the merger of Exxon and Mobil. Analysts said that improved earnings stability, falling oil prices, long-term capital productivity, and enhanced competitive advantage in technology were the main reasons behind the mega merger.
Improved Earnings Stability
The merged entity's functional and geographic diversity was expected to improve its combined business and financial performance by reducing the sensitivity of the company's earnings to volatile market conditions inherent in the energy business. ExxonMobil's diverse portfolio of assets - crude oil & natural gas production, petroleum refining & marketing, and petrochemicals - was expected to generate more stable operating cash flows and higher long-term returns. From a geographic point of view, ExxonMobil's competitive position was expected to be further strengthened in mature markets and the company was well-positioned to exploit growth opportunities in emerging markets.
Exxon had vast experience in deepwater exploration in West Africa while Mobil had production and exploration interests in Nigeria and Equatorial Guinea...
The Controversy
Although the FTC had approved the merger of Exxon and Mobil, it faced strong opposition from oil retailers and marketers, environmental conservation groups, and employees. To fulfill the conditions laid down by the FTC, for merger approval, Exxon and Mobil had to sell many of their service stations in the US. This caused a lot of resentment among the retailers and marketers who had invested huge amounts in building the brands. Moreover, they had to enter into new supply contracts and change their marketing strategies and sales targets. The National Coalition of Petroleum Retailers (NCPR), an advocacy group representing small gasoline retailers released a statement saying, "While we recognize that this merger is driven by the need of the companies to make their upstream activities, specifically exploration and production operations, more efficient, we see the potential for adverse effects on marketing operations, which ultimately have the greatest effect on the American motorist. We are most concerned with the fact that we are losing our third major supplier at the wholesale level, with the impact potentially greatest in major markets such as New Jersey, New York, and Texas...
Status in Early 2004
Since the fiscal 1999, ExxonMobil's financial performance had improved significantly. For the financial year ended 2003, ExxonMobil's total revenues had increased to $246,738 mn compared to the combined revenues of $184,753 mn in the fiscal 1999, an increase of 33.5%. The net income during the same period had increased to $21,510 mn from $7,910 mn in the fiscal 1999 (Refer Exhibit V). The total assets of the company during the fiscal period 1999-2003 had increased from $144,521 mn to $174,278 mn, an increase of 20.6% (Refer Exhibit VI). In April 2004, ExxonMobil's share price was quoted around $44 (Refer Exhibit VII). Though the company claimed that the improved financial performance was the direst result of the synergies reaped from the merger, a few analysts felt that it was mainly because of a significant increase in oil prices (Refer Table II). During the past five years, ExxonMobil had reported a cumulative net income of $73.92 bn. According to the company sources, ExxonMobil had generated over $120 bn in cash since the merger was completed...
Exhibits
Exhibit I: Exxon & Mobil's - Share Price Movement (13/11 - 15/12/1998)
Exhibit II: Conditions for Approval of Exxon-Mobil Merger
Exhibit III: A Brief Note on BP, Royal Dutch/Shell and Total
Exhibit IV: Exxon Valdez Oil Spill
Exhibit V: Exxonmobil - Consolidated Statement of Income
Exhibit VI: Exxonmobil - Consolidated Balance Sheet
Exhibit VII: Exxonmobil Stock Price Chart (March 1999- April 2004)
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