The Exxon-Mobil Merger - Case Study Example

Essay: Mergers and acquisitions The Exxon-Mobil Merger A merger is a legal combination of 2 corporations or businesses into a single entity, whereas an acquisition takes place when one corporation takes over another and entirely launches itself as the new proprietor (whereby the target corporation continues to exist as an autonomous legal entity managed by the acquirer). Mergers and acquisitions are both parts of facets of management, strategic management, and corporate finance concentrating on combining, dividing, buying and selling of various companies and comparable entities that can assist a business develop rapidly in its particular location of origin or sector, a new location or new field, without necessarily forming a subsidiary, other young entity or by use of a joint venture. Activities involving mergers and acquisitions can be defined as a kind of restructuring in that their consequences results in some reorganization of entity with the objective of providing positive value or growth. Consolidation of a sector or industry takes place when extensive M&A activity focuses the resources of several small companies into a few bigger ones, such as taken place in within the automotive industry. Big oil got much better in 1999, when Mobil and Exxon signed a $ 81 billion agreement to combine and form Exxon Mobil. The following are circumstances that resulted in the merger and acquisition that happened between Exxon and Mobil. The period between 1994 and 2000 saw a greater level of merger activities take place and this was a reflection of key change forces. There were market shocks comprising of globalization of markets changes in technology, intensified sources and forms of competition which led to major industries leading deregulated and the changing dynamics especially of financial markets. Thus restructuring and mergers in the oil industry mirrored these wider forces together with its own unique features. The oil industry therefore is big in size as well as challenges. Over the past few decades there were several oil reserves that had been discovered outside of the US. Possible potential for additional reserves in the future were in countries with significant business as well as political risks. Historically crude oil and products from oil have been subject to broad price fluctuations. Relative merits of operations combined with exploring, producing, refining and marketing have completely been transformed. There was also development of intermediate markets along the value chain. There had also been increased activity in forward, futures and spot markets. Thus repeated prices of oil shocks had caused the oil industry to rethink strategy and get involved in a broad range of adjustment reactions. Efforts to restructure sought to lower costs and key horizontal mergers occurred from 1998 to 2001(Weston,2002). Thus on 16th June 1998, Exxon’s CEO Mr. Lee Raymond, met with Mobil’s CEO Mr.Lucio Nato at Mobil’s headquarters in Virginia. It is at this meeting that the two CEOs discussed about the prospect of merging the two companies. The management later on continued with discussions and informed their respective boards afterwards. On 11th August 1998, Amoco Corp and the British Petroleum Co.PLC announced their merger agreements terms Mr.Nato and Mr. Raymond shortly after this announcement recommenced their discussions factoring in this new benchmark in pricing. The management of Mobil in mid-August 1998 requested Goldman Sachs to carry out strategic alternatives analysis that was available to Mobil. A month later, 14th November, Goldman Sachs offered to the Board of Mobil its analyses concerning the different potential transactions which included the possibility of merging with Exxon. A meeting was held at Exxon’s headquarters on 19th October, November and was attended by Messrs, Mathews, Raymond, Gillespie and Noto reviewed probable relative ownership ranges ,widening their discussions which comprised of issues such as how the sitting directors representation on the board of the consolidated company would be done. In November 1998, there was exchange of due diligence, representatives and request lists between Mobil and Exxon. There was a video conference participated in by their advisors, several meetings telephone calls which were aimed at conducting reciprocal business, legal, finance and accounting due diligence. On 12th November, there was a reciprocal confidentiality contract that was entered. On 26th November 1998, Mr.Raymond and Mr.Nato discussed by telephone reports appearing in the media about their impeding merger and on 27th of November, before the NYSE trading was opened, Mobil and Exxon issued a combined statement which confirmed that the two corporations were in discussions about the possibility of their merger. Thus over the weekend of 27th November 1998,representatives of Mobil and Exxon together with outside counsel held discussions aimed at resolution of open issues and 30th November, Noto, Raymond and Messrs arrived at an agreement in principle pending the approval by the board, pertaining on the exchange ratio and the resultant exercise price of the stock option. Following the successful approval of their respective boards, Mobil and Exxon finally, officially signed a contract and plan of merging on 1st December 1998.The merger was approved by the shareholders of both companies in May 1999.On 29th September the same year, an antitrust approval was granted by the European Commission and the historic merger was eventually completed on 30th November 1999.Mobil was now a fully owned subsidiary of Exxon. The new combined company name was known as Exxon Mobil Corp. The most likely reasons why the two companies merged was probably due to advantages stemming from economies of scale. This is because at times big is good, and this implied that there would be reduced prices for consumers and a strong competitive edge for the new company. The need for greater efficiency would have been another possible reason for the merger. This is because the merger would permit the new and more efficient corporation to shut down outdated refineries, cut 7% of their workforce and be able to provide customers with a cheaper and better product. The Mobil and Exxon merger was significant so as to allow the new company to offer more effective competition in the wake of extremely lower oil prices and increased costs of discovering new oil reserves. This therefore was not a combination borne out of frustration and desperation but one whose basis was opportunity. Thus there were good effects resulting from this merger, with Exxon-Mobil now becoming the biggest company worldwide with sales of over $433.5 billion and an estimated market value of $407.8 billion. By 2009, Exxon Mobil had total confirmed reserves of 22.99 billion drums of oil. At present daily production average 3.93 million drums of oil. This is really a staggering figure bearing in mind that Exxon-Mobil is 4th biggest producer of oil in the world after Iran, Russia and Saudi Arabia. The other major positive effect trickled to the people in the US. Thus with Exxon-Mobil and other big oil producers in the US such as ConocoPhillips and Chevron making machinery for oil extraction. Forecasts have it that the US would by 2020 would surpass Saudi Arabia and become the world’s biggest oil producer and by 2030, the world’s top oil exporter. By 2035, the US would become self-sufficient. This will therefore help allow prices of oil in the US and assist the US economy in exportation of more oil than the amount imported. Generally, this was a very successful merger and at the same time it was crucial in aiding the US to become an oil sufficient nation. The new corporation Exxon-Mobil employed a new organizational structure which was based on a conception of 11 distinct global enterprises planned to permit the corporation to offer effective competition in the ever-challenging and changing global energy industry. The new structure resulted in more tactical and focused approach since distinct enterprise lines were able to prioritize available opportunities and be able to allocate resources on a global basis. This new global orientation would also lead to easier and faster recognition and execution of the very best practices, something which is very important in the achievement and maintenance of a leadership that was competitive.Exxon-Mobil resulted in 5 worldwide upstream enterprises ;Upstream Research, Exploration, Production, Development and Gas Marketing which were all headquartered in Houston alongside Minerals company and Chemical company. It was also agreed that 4 downstream companies were to be headquartered in Fairfax, Virginia and these included; Research and Engineering, Refining and Supply, Specialties in Lubricants and Petroleum and Fuels marketing. There were several essential changes in the organizational structure that took place. Originally the two companies employed functional or “unitary” organizational structure which represented a relatively greater degree of managerial authority that was highly centralized. After the merger, the two companies employed the “M form” of organizational structure which had multidivisional activities. Thus the features of this form included decentralized divisional operations, a very strong central staff, active communications amongst divisions, functional staff teams for associated team activities and support of staff from headquarters (Weston, 2002). There were main changes that took place after the merger of Mobil and Exxon. Thus there was a transition team that was set up .It started in the 1st quarter of 1999 with around 150 individuals who were allocated 25 “key” transition teams. This number would grow to exceed 1500 Mobil and Exxon working together on 140 teams just before closing was done. The teams worked together in harmony and with a great level of common sense of unity of purpose. This really was an outstanding bonus and exceeded the expectations of everyone and became a great source of confidence especially in how well the two corporations would blend together. There were changes in the senior management of the new corporation. Thus the former CEO and Chairman of Exxon Corporation, Mr. Raymond became the new CEO and Chairman of Exxon Corporation, whereas Mr. Lucio Noto, former CEO and Chairman of Mobil Corporation became the new corporation’s Vice Chairman. In addition to these two senior men, there were to be 4 new senior vice presidents: Harry J. Longwell, Rene Dahan, Robert E. Wilhelm and Eugene A. Renna. Rena was formerly Mobil’s President and Chief Operating Officer whereas Wilhelm, Dahan and Longwell were formerly Exxon’s senior vice presidents. The human resources new structure was arranged such that the coal and minerals and chemical companies would all report to Dahan. On the other hand, all the upstream companies would be reporting to Longwell. The downstream companies would on the other hand report to Renna. Many service groups and corporate staff departments would report to Wilhelm. The new corporation’s board of directors comprised of 6 employee directors and 13 non-employee directors who were all part of the members of the senior management team. Of all the non-employee directors 9 were Exxon’s board members and 4 sat on Mobil’s board. The two corporations therefore aligned well with one another in almost every aspect of the business. There were plans also that were aimed at reduction of workforce. Thus the employees who were affected and had to leave because of the merger were given assistance in job placement and comprehensive severance packages. References Rai Anoop, Neelankavil James. Business of International Business. New York: M.E Sharpe,Inc, 2009. Weston Fred. "The Exxon-Mobil Merger:An Archetype." Forthcoming Journal of Applied Finance,Financial Management Association (2002): 5,8,9. http://www.unm.edu/~maj/Security%20Analysis/Exxon-Mobil%20Merger_.pdf http://www.prnewswire.com/news-releases/exxon-mobil-corporation-announces-new-global-structure-updated-forecast-by-mid-december-77397052.html Read More