Cross-Border Restructuring - Essay Example

Cross-Border restructuring – An Introduction Cross-border restructuring is a phenomenon which started to take shape during the 1990’s. This was because a lot of economic and technological developments were taking place at that time and these elements encouraged firms to enhance their competitiveness through global tie-ups. Factors such as liberalization of rules that governed trade and capital movements, privatization and regulatory reforms opened markets and such situations required firms to adjust to rising international competition and one way of doing this was through cross-border restructuring which happened as a result of mergers. Reasons for Cross-Border Restructuring Firms get into Cross-Border restructuring or global restructuring because, it improves their business. Cross border restructuring enables firms to increase their efficiency and makes way for innovation to take place through the diffusion of technology, production, managerial and marketing expertise, which happens because people with different kind of knowledge and skills come together as a result of the merger. During the process of restructuring the concerned firm or organization undergoes many changes. These include having to make investment in new plant and equipment, cessation or downsizing of operations and the forging or termination of commercial alliances with other firms. These sort of actions are carried out in most cases simultaneously by the two firms which have decided to merge. For example, investment in a new or existing facility can take place in parallel with a firm’s withdrawal from a different area, and/or concludes an agreement with another company to enter into a joint marketing or research initiative. The process of restructuring is an ongoing one after a merger and we see successful firms constantly adjusting to shifts in the changing business conditions in order to face competition. Factors such as advances in information and communication technology (ICT) have enabled the restructuring process to be carried out smoothly as it puts more communication power into the firms. The reduction in transportation, computing and telecommunications costs has further facilitated firms in expanding their international transactions with cross-border mergers. The Cross-Border Restructuring in the Oil Industry In the oil industry there has been significant cross-border restructuring due to cross-border mergers. Such significant moves for cross-border restructuring began in the 1990’s. There were several important tie-ups and mergers between a number of international players in this segment. Examples include the Exxon-Mobil (1998) and Chevron-Texaco (2000) merger, BP (United Kingdom) and Amoco (United States), in 1998 resulting in BP Amoco (United Kingdom/United States) and Arco (United States), in 1999, Total (France) and PetroFina (Belgium), in 1999 resulting in TotalFina and TotalFina (France/Belgium) and Elf (France), in the year 2000. These companies decided to go in for cross-border restructuring because, it helped them to reduce costs by exploiting economies of scale more effectively. It gave them the opportunity to expand to international markets. Though the year 2001 was a turbulent one for the energy industry, the process of cross-border restructuring in the oil industry has been one which is quite favorable as it has led to the improvement of quality and reduction the cost for the firm involve in such restructuring. For example the US firms Phillips and Conoco announced their intent to merge in November 2001, with a view towards strengthening their international competitiveness. As noticed there has been considered motivation towards merger and the restructuring process which occurs as a result of mergers. Following is a look into the reasons behind such motivation in the oil industry: Cross-border trade and investments have become more feasible because of improvements in technology. Such improvements have directly cut down the cost of transportation and communication in a major way. Tariff barriers and non-tariff barriers have been removed in goods and services due to successful world-wide trade negotiations. . Competition has increased as much of the worlds have moved into the process of deregulation and privatization. Such processes have opened up former monopolies, state-owned enterprises and other limited entry markets to other markets thereby increasing business opportunities. Firms are able to finance acquisitions with highly-valued shares because of the soaring stock market. Through merger a company seeks to expand operations and become more profitable in this fast-paced and high-tech world. The process of a merger enables a firm to effectively penetrate a foreign market, with different national tastes. Case Studies The British Petroleum and Amoco restructuring process The restructuring process of British Petroleum and US oil giant Amoco resulted in the creation of Britain's biggest oil company – BP Amoco. This merger is a significant one as both companies are big players in the oil industry and share strong reputations for using sound operating practices, and show themselves to have environmental and social responsibility. The new company, BP Amoco has its headquarters in London. When announcement of the merger happened BP’s share prices soared. BP-Amoco’s chief executive Sir John Browne1 comment on the merger was that the deal was a superb alliance of equals with complementary strategic and geographical strengths and it will create a new super-major that can better serve millions of customers worldwide. This merger occurred in the year 1998 and it was a time when the world’s oil prices had fallen to their lowest levels in over a decade. Both BP and Amoco have made significant investments in solar energy as well. In the year 1997, BP's earnings were $ 4.6 bn and Amoco's totalled $ 2.7 bn. Through their merger, they expected a combined revenue of $ 108 bn, using capital of about $ 53 bn and such a level of revenue would take the united group into the world's top trio of oil majors. The BP Amoco group will have combined reserves of up to 14.8 bn barrels of oil and gas and their daily production was expected to be some 3 mm barrels. In this deal Amoco shareholders will get a 25% premium above BP's current market value. The purpose behind the merger was to increase pre-tax profits of both the partners as well as enable them to further their investment opportunities. Through the process of cross-border restructuring, both companies have cut down costs by exploring new business avenues, streamlining business processes and reducing staff. They will have important positions in major oil and gas provinces of the world, such as the North Sea and North America. The combined strength of BP and AMCO in the area of chemicals operations will create a business opportunities with revenues worth some $ 13 bn. It will bring together the strength of BP in Europe and the strength of Amoco in the United State, which will in turn give a very powerful platform for them to expand into the Asian continent, in which both companies already have significant investments. Their strength in the chemical sector will also expand making them one of the world's largest petrochemicals companies, with leading positions in 7 core products that include acetic acid, acrylonitrile, aromatics, purified terephthalic acid (PTA), alpha-olefins, purified isophthalic acid (PIA) and polypropylene. The Total and PetroFina Merger Total is an oil company established in France. It’s chain of business covers production of crude oil, oil refining, power generation and exploration of natural gas resources, and this business scope has enabled it to come within the top six oil production companies in the world. It is also a major manufacturer of chemicals. Thus Total's worldwide operations are conducted through three business segments which include the following: Exploration and production of oil, gas, power and other energy sources. Trading, shipping, refining and the marketing of TotalFina and Elf brand of petroleum products as well as their automotive and other fuels. Specialty productions in LPG, aviation fuel and lubricants which will be marketed through retail network and other outlets worldwide. Chemicals production activities including the production of base chemicals such as petrochemicals, fertilizers and Specialties for industry and the consumer market. In the year 1999, this French oil company purchased Belgium's PetroFina in a deal which valued PetroFina at about $12.9 billion. The new company was named TotalFina and was listed in Paris, Brussels and New York. This merger established the company as the world's sixth largest oil company and the third largest oil company in Europe. The cross-border restructuring which was to happen due to the merger was expected to fetch TotalFina a total sales of $53 billion and net income of $1.92 billion. The market capitalization of the combined was $39 billion at the time of the merger. Total's market capitalization is $29.5 billion while PetroFina's is $9.3 billion. Total grabbed the opportunity to gain acquisition of Petrofina when its major shareholder, the Belgian financier Albert Frere, was trying to his 30 percent stake for several months. As part of this merger Total paid cash for 41 percent of the stock and exchanged shares for the remainder of the settlement. The main benefit for Total in the merger is gaining more opportunities to diversify in the international oil market arena and boosting their refining and marketing operations. Total productivity gains were expected to increase in the areas of the North Sea with the merger. The merger would give it the necessary power to expand deep offshore explorations in countries such as Angola and the United Sates. The TotalFina and Elf merger Take over by the Franco-Belgian group Totalfina of the company French oil transnational Elf has resulted in the creation the world’s fourth largest petroleum marketing company of 2071 units. This consolidation closely follows the merger of Total with Petrofina. In the world oil market, TotalFina is in the sixth place, while Elf comes close to the eighth place in terms of production. The union between the two companies will be very advantageous to them in terms of the increase in refinery capacity, where it will place TotalFina and Elf fourth with some 2,434 units. The new company will have the fourth strongest reserve position in the world with 9655 units . The Shell and RD merger The Royal Dutch Petroleum Company was a Dutch company, which was established in the year 1890 by Jean Baptiste August Kessler, Henri Deterding and Hugo Loudon, through the grant of a Royal charter was granted by Dutch king Willem III. The Shell” Transport and Trading Company is a British company, which was established in the year 1897 by Marcus Samuel and his brother Samuel Samuel. Both companies have a long hstroy behind them and they have sustained through many economic ups and down. In the year 2004, The Royal Dutch Petroleum Company and Shell Transport and Trading Company merged to form Royal Dutch Shell PLC. Through the merger Royal Dutch Shell PLC became a multinational oil company and came within the top six oil production companies in the world. The new company has its headquarters in London (Shell Centre) and in The Hague. The company has worldwide reserves which is equal to about 11.5 billion barrels of oil. In additn to its primary oil production activities, it also produces bitumen, refined products, and chemicals, transports natural gas, trades gas and electricity, develops renewable energy sources, and is the owner of 45,000 gas stations. As a result of this merger, Royal Dutch Petroleum (RD) will have the A-class shares of Royal Dutch, and Shell Trading & Transport (SC) will be the B-class shares. Royal Dutch holds 60% of the assets of Royal Dutch Shell, and Shell Trading & Transport holds 40%. Through the merger, the combined firm can issue shares so as to get the necessary funding for potential acquisition targets. As part of the restructuring process, Royal Dutch would be merged into a subsidiary, Shell Petroleum N.V. (“SPNV”), and the remaining shareholders in Royal Dutch (the “Minority”) would receive cash or, at the option of UK resident shareholders they can avail of loan notes which they can exchange into Royal Dutch Shell A shares. In all the above-mentioned case studies, mergers happened because the firms involved in the merger wanted to become bigger than they were before the merger. The merger was looked upon as successful business initiatives which would help them to achieve their business goals. If you take the example of BP Amoco, as a result of the merger between BP and Amoco, the new company BP Amoco became Britain's biggest oil company. In the case of the merger between Total and PetroFina, TotalFina expected a $53 billion and net income of $1.92 billion which is a huge leap for their business. Oil companies which have merge have done so in order to expand their business as well. The merger of BP and Amoco has helped to combine the strengths of both these companies in the chemical sector and this resulted in them becoming one of the world's largest petrochemicals companies, taking the leading position in the development of 7 core chemical products. The combined strength of a merge can help to bring enormous resources to the new company formed by the merger. Taking Royal Dutch Shell PLC as an example, its worldwide reserves after the merger is equal to about 11.5 billion barrels of oil. On the whole what can be said about the process of cross-border restructuring in the case studies mentioned above is that they are beneficial to the oil companies who took the decision of going by a merger and varying out restructuring process thereof. Conclusion It has been noted that when oil companies merge, they have done so with the intention of becoming a bigger company, eliminating excess capacity and squeezing out inefficiencies. The merger have helped them to combining complementary products or services and provide better service for their customer and thereby acquire a larger share in oil industry. One thing to look out for when such big mergers happen is that they can substantially reduce competition. This can happen in two ways. One way is that the merged firm will have the ability duet to its large share in the market as a result of the merger (say around 35 % or greater) to increase prices, regardless of the actions of other firms in the market. Another way is that the market may become so concentrated that firms engage in tacit or express collusion which means that they can expressly or implicitly, raise prices or reduce output. According to James Love, director of the Consumer Project on Technology, an advocacy group based in Washington,, the worldwide consolidation of the oil industry can make way for a situation where Organization of Petroleum Exporting Countries (OPEC) to keep prices high as OPEC benefits from increased oil company concentration. So, healthy competition is necessary in such situation and there must be a way for competitors to be able to reach an agreement on price increase and be able to detect and punish firms that breach the agreement. This will in turn prevent the creation of market structures in which firms have the power to unilaterally set prices or expressly collude or tacitly coordinate. There is concern from consumer and environmental groups who feel that more and more oil company merger will to an unhealthy concentration of power. They feel that such mergers are unmaking history by putting back some of the pieces of the Standard Oil empire that was broken up into 34 companies by the US Supreme Court in 1911. Wenonah Hauter2, director of Public Citizen’s Critical Mass Energy Project, share consumer and environmentalists view and says that the trend towards more consolidation is bad for consumers in the long run. It has the potential of increasing the political power of these larger companies to influence environmental and energy policy. Evidence of his vies have been seen in the fact that many merged oil companies have been involved in campaigns against the Kyoto Protocol, which is the international agreement on climate change. As per this treaty industrialized countries must reduce their heat-trapping greenhouse gas emissions, caused by the burning of coal, oil and petrol. The merged oil companies have exerted their influence on US lawmakers, through campaign contributions and lobbying, and this has thwarted ratification of the Protocol. Therefore, what the oil companies interested in mergers must look into is that they must not just be concerned for the economic benefits reaped by the mergers, they must look into the environmental concerns and the fact threat they have the potential to increase oil prices which must be curbed by some effective mechanism which they must decide upon. Cross-border restructuring results in loss of jobs, in order to cut down on expenses and some operations can become closed down due to the merger requirement, which may be a disappointed to many working in those operations as well as the public. For example, if we take the merger of BP and Amoco, through the merger resulted in placing them amongst the top three of international oil producer’s 6,000 people worldwide lost their jobs as a result of the merger. However, it appears that the major leader in the oil market have understood the concerns of the environmentalist and are addressing them in the following ways: BP has gone into the development of solar energy and intends to be the new world leader in photovoltaic production. Shell is into exploring the use of biomass, solar and wind energy and their objective is to capture a 10% market share in renewable energies by 2005. Total is into the design and marketing of photovoltaic systems and is making investments in other renewable energies. It is up to the remaining Oil companies in the oil market to follow suit and make exploration of renewable energies as part of their business objectives. References Shell centers its thinking on Europe Basta, Nicholas., Energy Industries BP and Amoco in oil mega-merger BP-Amoco merger Global mergers: trade issues and alliances in the new millennium PetroFina, Total seal deal Read More