BP Seen Takeover Target - Essay Example

BP Seen Takeover Target Following the BP’s chief executive move to sell the company’s 50% stock in TNK-BP, the global oil company has been seen as a takeover target. The purpose of the move, to sell assets, was to rescue the company following the huge losses incurred and the large amount of money the company paid for the cost of 2010 oil spill. As Lustgarten state “the disaster did not only affect the company financialy but also ruined its reputation (31)”. According to an article by the economist, the deal is one of the most expensive in oil industry hstory. The company is one of the world’s top five nongovernment oil companies, in terms of profitability, production, and market value. The company’s reserves are worth $ 7 a barrel while its rival Shell is worth $14. The company’s market value is the least compared with the other big four companies. The 50% sold accounted for about two third of the company’s oil production. The assets were in exchange of $12.3 billion cash and 12% stock in Rosneft, a Russian oil corporate. Rosneft is expected to also acquire the remaining 50% stock to assume full ownership. According to the London Business School, the selling of its assets, as well as, expensive settlements for suits related to the oils spill damages is equivalent to a takeover. The move, as well as, the oil spill tragedy, makes PB weak and its competitors including Royal Dutch Shell may bid for more stake. According the company’s Chief Executive, in an interview, the reduced company’s size may lead to a takeover attempt. The Chief Executive also unveiled the company’s expected short-term and long-term plans meant to spur growth. The plans include raising new projects’ margins and issuing back shareholders’ funds. The shareholders have also been rewarded by a 12.5 % increase in dividends paid in the 2012 third quarter. Additionally, due to the importance of the company to the United Kingdom, the government may oppose any move meant to bring a merge or acquisition. The company is one of the UK economy backbone employs a large proportion of the country’s population and earns the government huge revenues in terms of taxes. Among the company’s plans, there is a defense strategy following speculations that the company may be taken over. Many investors are interested in the company’s shares because of their low value. A takeover would be of benefit to the shareholders who would be able to recover some of their invested money. The company has liquidity problems, and the only option left of fighting for its survival in the market is through a takeover or selling of some of its assets. However, selling some of the assets is may be a dangerous move as it may result to bankruptcy of the firm thus requiring it to dissolve. Additionally, it may be difficult to raise capital through debt securities, for example, bonds because of the risk associated with the company. The rate of interest would be significantly high since the financial institution would consider the risk. It would be of benefit to the new owner because of the valuable assets and human capital that the oil company holds. Since it would be an entirely different company, no new suits would be expected and, therefore, the new owner will easily turn the nearly collapsing company into a global profitable company. If the new trader would then stop the BP’s shares trading, immediately after the purchase, the market price would go up. Finn states that “the value of the stock would go up because of decrease in demand (131)”. Additionally, if the new owner would be another oil company, the benefits would be even more. The market share and dominance would go up. This in turn, would increase the company’s profitability and market value. A merger would also be of benefit to the current shareholders. Their stock in the company has declined significantly since the oil spill disaster. In addition, they have not been getting the returns that made them invest in the company. A merger will inject in extra capital, expertise and this will revive the company to its former performances. In case the company collapses, for example, if not taken over, they would lose almost all their investments. According to Fleischer, “a merger causes the market value of the weak company to go up as the risk associated with the company goes down (103)”. This would benefit BP’s shareholders. A takeover on the hand it will enable the current shareholders to receive back their investment, or the amount the new owner is offering if they are minority shareholders. Since the company is not doing so well currently, the current shareholders may lack the bargaining power to influence a higher price for their shares. The takeover of the company will enable the company to meet its liabilities that are already in arrears and manage to meet its responsibilities as they fall due with time. The suppliers who are still unpaid will benefit from the takeover since they will get a guarantee the payment their unpaid dues. In addition, they will continue to do business with the firm in the unforeseeable future. Employees would also benefit from a merger or acquisition. Many employees have lost their jobs at the company since the crisis, and the company is still at stake. After acquisition, the old company’s operations would turn out to be profitable thus saving the employees’ jobs. United Kingdom would also benefit from a takeover move. This is because it will save the employment for the current employees. However, a new owner may opt to bring along his employee or restructure by employing new workers. This would mean that the new management would retain only the very valuable employees to ensuring a smooth transition. The company’s collapse would result to a negative effect to the economy. All employees will then lose their jobs and lose any unpaid remuneration. Additionally, collapse of the company will disrupt most of the employees’ learning curve thus requiring them to search for new jobs. This will hinder their development and chances of advancing up the corporate world ladder in their careers, because of the disruption in their learning curve progress. Global economy would also benefit from the takeover. This is because the company would resume operation in regions it had stopped thus increasing the global oil supply. The increase in global supply means constant supply of oil as well as, reduction of oil’s global prices. The return of BP’s product in the market will also increase varieties of oil and oil products to consumers in the market. According to Lovins “this would result to an increase in competition among the giant oil companies in the market, thus resulting to improved product qualities (240)”. The return to full operation of BP would mean growth of other smaller economies because the company will reinvest again in other economies by opening up subsidiaries. Further, it will create business opportunities to a number of people. Individuals will open up small and medium businesses to supply and sell their products around the world. The strategy of BP to sell itself or someone else move to buy it is the best option for the firm to survive. Currently all the avenues that the firm may use to raise extra capital to finance its operations are costly or they are not willing to finances the company considering the risks involved. This, therefore, limits the company options of sources of financing. Take over, merger or acquisition of a large part of the company’s holdings are, therefore, the remaining viable options to revive the firm back to its former reputation, market dominance and revenue generating levels. Either of the options will have a positive effect on all the stakeholders involved. However, even in the event of the worst of scenario the new owners opts for a strategy that will be of a negative effect to employees and shareholders, survival of the company will out way the negative effects. Therefore, BP should adopt and implement this strategy. Works Cited Finn, Ed. Under corporate rule : the big business takeover of Canada. Ottawa : Canadian Center for Policy Alternatives, 2005. Print. Fleischer, Arthur. Takeover defense. Gaithersburg [Md.]: Aspen Law & Business, n.d,2001. Print. Lovins, Amory. "Profitable Solutions to Climate, Oil, and Proliferation." A Journal of the Human Environment, (2010): 236-248 Lustgarten, Abrahm. Run to failure : BP and the making of the Deepwater Horizon disaster. New York: W. W. Norton, 2012. Print. Read More