Sunday, February 8, 2015

Merger Happy: Lessons of ExxonMobil



            Standard Oil, Rockefeller’s oil conglomerate was broken up in 1911, into 34 separate companies (“About Us”). Two of those companies were the forerunners to the companies that came to be known as Exxon and Mobile. After almost a century apart, they joined back together on November 30, 1999 after over 18 months of talks (“About Us”). The merger did not happen in a vacuum. The head of the Bureau of competition at the Federal Trade Commission at the the time noted that there were several other contemporary mergers: “In recent months, we have seen the merger of BP and Amoco - which was the largest industrial merger in history until Exxon/Mobil was announced --and the combination of the refining and marketing businesses of Shell, Texaco and Star Enterprises to create the largest refining and marketing company in the United States” (“Remarks”).
Exxon was the larger of the companies in a merger worth $75.3 billion dollars, larger again by almost half of the merger between BP and Amoco (“12 Years Later”). Both companies had full control of their revenue streams, from extraction to refining to retail sales, though they often had partnerships. This merger of equals on a horizontal basis allowed them to create corporate synergies totaling up to $3.8 billion in pretax savings (“12 Years Later”)
The merger was not without its critics. Public Citizen, and advocacy group, put out a list of the things to worry about with the merger, including “If Exxon-Mobil were a nation it would have the 18th largest economy in the world larger than Denmark, Finland, Austria, and Greece,” and “Exxon-Mobil, with more than 50 refineries in a dozen countries, will be the most powerful oil refiner in the world. This position will allow Exxon-Mobil to shift production to the cheapest, most worker-unfriendly environment” (“10 Facts”).
The company countered that the market had changed. By their measure, the Standard Oil giant had over 80% of the market for oil, whereas a combination of Exxon and Mobile would only control 11% of the market (“Exxon, Mobile Divestures”).  In the end, the regulatory bodies were worried about monopoly conditions one the retail side, especially in the north east, where both companies had been originally based after the split up of Standard Oil. To get approval from the FTC, they had to sell 1800 gas stations to outside firms (“Deal Nears OK)”.
The result for consumers is hard to ferret out. The average gas price for consumers the month the merger was announced was $0.873 a gallon. A year later, it had risen to $1.124 nationwide (“U.S. Total Gasoline”). It is hard to tell how much of that increase was from the merger of the two companies and how much from other contemporary economic effects. Since gas prices eventually came back close to the pre-merge low before taking off based on large geopolitical issues, it looks as if there was little overall consumer effect in the long run. As for shareholders, it looks as if the merger was a wash. For the past fifteen years, the total return of the XOM stock has moved in tandem with an index of other oil company stocks, but has beat the S&P 500 over that time by 2.75% (Morningstar). If there had been true efficiencies to work out through scale, it would be expected that the value of the combined companies would surpass an index of comparable publically traded companies.  That there was little effect overall for consumers shows that the merger was not necessary, but it did not hurt them. Perhaps the FTC-mandated divesture was enough to make the long-run monopoly concerns not an issue. That there were not greater gains to scale in terms of returns in the equities market should show future managers that merging may bring headlines, but not necessarily growth.

References

Baer, William J.. (1999). Statement of the Federal Trade Commission. Federal Trade Commission. Retrieved from http://www.ftc.gov/sites/default/files/documents/public_statements/prepared-statement-federal-trade-commission-exxon/mobil-merger/exxonmobiltestimony.pdf

CNN Money (1999, November 23). Exxon-Mobil deal nears OK. CNN Money. Retrieved from http://money.cnn.com/1999/11/23/deals/exxon/

Corcoran, Gregory (2010, November 30). Exxon-Mobil 12 Years Later: Archetype of a Successful Deal. Wall Street Journal. Retrieved From http://blogs.wsj.com/deals/2010/11/30/exxon-mobil-12-years-later-archetype-of-a-successful-deal/

ExxonMobil. (2015). Our History. ExxonMobil.  Retrieved from http://corporate.exxonmobil.com/en/company/about-us/history/overview

Morningstar. (2015). Exxon Mobil Corporation XOM . Morningstar. Retrieved from http://performance.morningstar.com/stock/performance-return.action?t=XOM&region=usa&culture=en-US

Public Citizen. (2015). 10 Facts About the Exxon-Mobil Merger. Public Citizen. Retrieved From http://www.citizen.org/cmep/article_redirect.cfm?ID=6307

U. S. Enegry Information Administration. (2015, February 2). Petroleum & Other Liquids. UEIA. Retrieved from http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMA_EPM0_PTC_NUS_DPG&f=M

Wilke, J. and Liesman, S. (1999, January 20). Exxon, Mobil Divestitures Are Seen To Obtain U.S. Approval of Merger. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB916791504585647500