Exxon Mobile Merger

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Forthcoming Journal of Applied Finance, Financial Management Association

The Exxon-Mobil Merger: An Archetype

J. Fred Weston* The Anderson School at UCLA University of California, Los Angeles jweston@anderson.ucla.edu

February 26, 2002

Fred Weston is Professor of Finance Emeritus Recalled, the Anderson School at the University of California Los Angeles. Thanks to Matthias Kahl, Samuel C. Weaver, Juan Siu, Brian Johnson, and Kelley Coleman for contributions. The paper also benefited from comments at its presentation to the 1999 Financial Management Association Meetings (Orlando).


The Exxon-Mobil Merger: An Archetype

ABSTRACT: In response to change pressures, the oil industry has engaged in multiple adjustment processes. The 9 major oil mergers from 1998 to 2001 sought to improve efficiency so that at oil prices as low as $11 to $12 per barrel, investments could earn their cost of capital. The Exxon-Mobil combination is analyzed to provide a general methodology for merger evaluation. The analysis includes: the industry characteristics, the reasons for the merger, the nature of the deal terms, discounted cash flow (DCF) spreadsheet valuation models, DCF formula valuation models, valuation sensitivity analysis, the value consequences of the merger, antitrust and competitive reaction patterns, and the implications of the clinical study for merger theory. JEL classification: G34, G20 Keywords: Mergers; Acquisitions; Alliances

The Exxon-Mobil Merger: An Archetype
The high level of merger activities throughout the world between 1994 and 2000 reflected major change forces. These shocks included technological changes, globalization of markets, intensification of the forms and sources of competition leading to deregulation in major industries, and the changing dynamics of financial markets. Mergers and restructuring in the oil industry reflected these broader forces as well as its own characteristics. The oil industry is large in size and in challenges. In recent decades, most new major reserves have been discovered outside the United States. Potentials for future reserve additions are in countries with considerable business and political risks. The prices of crude oil and oil products have historically been subject to wide fluctuations. The relative advantages of operations integrated over exploration, production, refining, and marketing have changed. Intermediate markets have developed along the value chain. Spot, forward and futures markets have increased in activity. The reduced costs of information have lowered transaction costs. Barriers to entry have fallen and new specialist firms have emerged in most segments of the value chain (Davies, 2000). The ownership of oil and oil reserves has long been a powerful force in the economic, political, and military relationships among nations (Jacoby, 1974; Yergin, 1993). Repeated oil price shocks have caused the oil industry to engage in a wide range of adjustment responses. Substantial merger activity took place between 1980 and 1985. Diversification efforts into unrelated activities were unsuccessful. Restructuring efforts sought to lower operating costs.


Major horizontal mergers took place during the 1998-2001 period. The BPAmoco merger (announced on 8/11/98) projected $2 billion in savings, stimulating other oil companies to seek improvements in operations. The Exxon-Mobil combination was announced on 12/1/98. In December 1998, the French oil firm Total (founded in 1924 as Compagnie Française des Pétroles) announced the acquisition of PetroFina, a large Belgian oil company. On 7/5/99, the new TotalFina began a $43 billion hostile bid for the former state-owned Elf Aquitaine; the deal was completed at a price of $48.8 billion and became the fourth largest world oil company. On 4/1/99, an agreement was reached for BP Amoco to acquire Arco following negotiations initiated by Arco’s management. The U.S. Federal Trade Commission (FTC) required that...
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