Merger and Acquisition PDF

Running head: MERGER AND ACQUISITION 1
MERGER AND ACQUISITION
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MERGER AND ACQUISITION 2
In the recent past, the business environment has increasingly become turbulent and competitive.
Various reasons have been attributed to these changes including advances in technology and
increased global competition. Johnson & Scholes (2003) contended that organizations need to set
up new creative routes for enhancing their operations The corporate world has experienced major
paradigm shift in strategic growth plans, expansion and defense tactics in what has seen the
implementation tremendous mergers and acquisitions across all industries. The natural oil and
gas industry has itself been part of a voluminous merger and acquisitions transactions of the 21st
century in the United States.
Mergers and acquisition is a concept under corporate restructuring that often results in a situation
where two or more previously independent companies operate under a similar roof with the
objective of gaining financial or strategic objectives. Prima facie, there is little differentiation in
what results from a merger or acquisition, but the two actually have different approaches. A
merger results when two firms of equal size and scale, combine as a single entity and their
operations made under a similar roof. Here, the two previous entities cease to exist, and a new
one is created. Under an acquisition, one company often referred to as the acquirer, takes over
another company the target through established ways and brings it (the target) under new
management (Gaughan, 2018).
Mergers and acquisition are premised on the principle of synergy in that two firms that come
together are more valuable than when they operate separately. Other reasons for merger and
acquisitions include: industry trends, economies of scale, need to spread risks, need to
rebrand/alter corporate identity, to gain the competitive edge over other players and improved
market reach and access. Mergers, with respect to the business perspectives and end goal, take a
variety of forms. Mainly, there are horizontal, vertical and conglomerate mergers.
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A horizontal merger occurs when two firms in the same level or scale of operation in the same
industry come together often to challenge rising competition through combined synergies.
Vertical mergers on the other hand result from the combination of two or more firms in the same
industry but at different scales of operation. Conglomerate mergers involve firms from entirely
different industries, more often for technological and long-term strategic reasons.
Regardless of the form, a merger takes, due preparation and evaluation must be conducted to
guarantee its success. In particular, due diligence must be conducted to ensure suitability, and
that the new entity is a success (DePamphilis, 2011). It acts as the watchdog to ensure that all
aspects of consideration before the merger is formulated are keenly looked into. These aspects
may include the target's strategic position, financial prowess, operational resources, and assets as
well as legal matters (Crilly & Sherman, 2010).
In what made history on the map of world oil industry is the 1999 merger between leading oil
giants Exxon and Mobil to form Exxon Mobil Corporation. ExxonMobil was formed by Exxon
formerly New Jersey’s Standard Oil Company, and Mobil, New York’s Standard Oil Company.
Its headquarters are based in Irving, Texas and have over the years grown to become one of the
world's leading multinational oil and gas corporation. The company's stock is publicly traded at
the New York Securities Exchange (NYSE).
Seemingly, ExxonMobil came into existence in reaction to the growing competition from fellow
oil giant British Petroleum (BP) that had acquired several other oil companies. The most
significant one, however, was its 1998 merger with Amoco formerly the Standard Oil of Indiana
creating BP Amoco PLC. This mergers catapulted the company to become third largest oil
company in the world. With other acquisitions resulting thereafter, Amoco oil stations in the US
were rebranded to BP corporate identity.
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This posed a direct threat to both Exxon and Mobil who were also leaders in their different
capacities at the time. Exxon was at the time world's largest energy company. Mobil, on the other
hand, was second largest oil and gas company in the US. Their merger which occurred a year
later after the merger between British Petroleum and Amoco was obviously a retaliatory
response to the threat. Given the nature of the threat (world oil leaders joining hands) Exxon
being the acquirer had a hunt for an equally able ally to join hands. This explains why the deal
made history as it brought together the two largest companies of Standard Oil Trust and formed
the largest merger in American history. Several other mergers and acquisitions took place later
and spread their effects to the larger European oil markets.
The merger was an absolutely wise move by the two firms whose survival was under threat.
British Petroleum based in the United Kingdom had come to hunt for partners far away from
home. Amoco which was formerly a Standard Oil Trust company had joined hands with BP with
major changes happening including the rebranding of oil stations to reflect BP's corporate
identity. Exxon under the leadership of Lee Raymond had to institute immediate actions to
counter the growing competition that had placed its feet right in front with appropriate tactics in
what bore the Exxon Mobil Corporation. That is particularly correct because the company still
holds its world lead to produce about 2% of world's energy and 3% of world's total oil
production. Moreover, the company has set foot in the United Kingdom when it revealed
Infineum, a result of the company’s partnership with Royal Dutch Shell in 2017 (ExxonMobil,
2017). Mergers and acquisitions have been hailed by various studies as a strategic way of
fighting rivals. The 21st century has particularly sparked a lot of these transactions, with firms
that have the technological prowess coming out as strong acquirers (Wahle & Yokotaki, 2017).
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As the wave of mergers and acquisitions continues to prove an expedient option for growth, not
all oil and natural gas firms have taken this route. Abraxas Petroleum Corporation (NASDAQ:
AXAS) is one example of firms that continue to do it single-handedly. Founded in 1977, the San
Antonio based company is publicly traded. The company primarily engages in the exploration,
exploitation, development, and production of oil and gas properties in the United States and
particularly in the Permian/Delaware Basin, the Rocky Mountain, and South Texas regions. The
company also has several subsidiaries.
In light of the findings from the San Antonio Business Journal that ranked locally based public
companies dealing in natural gas and oil exploration and production in terms of revenues, Valero
Energy Corporation is the best candidate to merge with Abraxas Petroleum Corporation. The
firm prides in being the world’s largest independent refiner of petroleum. The findings further
report that Abraxas has in the last two years been making losses. It is only recently that the
company managed to post $ 13.7 million in profits against a revenue of $18.8 million in the first
quarter of 2016 and $16.0 million in profits in 2017 (Abraxas Petroleum Corporation, 2017).
Compared to Valero Energy Corporation’s net income of $4.065 billion and revenue of $93.980
billion for the year 2017, Abraxas is clearly not an equal. A closer look at the total assets of both
companies reveals that the latter is latter is best placed to acquire the former. Reasons that
support this thought include the fact that both companies are San Antonio based and therefore
little disturbance would result from any changes brought about by the acquisition. Another is that
Valero has previously made successful acquisitions, for instance, the 2011 acquisition of
Pembroke Refinery from Chevron. Although Abraxas’ Chief Executive Officer expressed
optimism in the rising profits trend, Valero is way ahead. Moreover, the fact that Abraxas stock
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trade at NASDAQ makes it a profitable target since Valero’s are traded at the NYSE which is
larger (Chapa, 2017).
All these considerations provide a strategic fit for the two firms to settle for a merger and
acquisition. The financial impact as a result of the acquisition is reasonably viable. The product
categories, line, and distribution avenues given the geographical proximity between the firms is a
plus to the deal.
Business level strategies detail moves made to offer some benefit to clients and pick up an upper
hand by exploiting their strengths, abilities in particular and their products. The fundamental
elements of ExxonMobil's business strategy include Steady attention on delivering operational
quality, establishing technological leadership, get the most out of benefits from the ExxonMobil
integrated model, capitalizing in acumen and discipline for their employees. Corporate-level
strategies refer to plans designed to achieve a specific objective and are often implemented
throughout the organizational structure. ExxonMobil attracts and retains a pool of exceptional
labor force. The company has additionally set to develop their employees to attain the finest
technical and leadership skills. This is made possible partly because the company recruits
talented personnel from all over the world and professionally develop them to deliver exemplary
performance.
The company also strives to maintain financial health through sound investment approaches. As
a consequence, the company has been rated excellently as an international energy company by
rating agencies such as Moody (ExxonMobil, 2017). Throughout the three business lines
(Upstream, Downstream, and Chemical), the company has engrained competitive advantages
that support its superior performance while creating shareholders value. The company has a
global integration policy on its three business lines that yield structural benefits that irk its
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competitors. Strategies have a tendency to be a long haul in nature, yet take into account
dynamic alterations, in light of vulnerability and changing economic situations.
In like manner, the existing strategies (business and corporate) only remain relevant if they are
able to respond to turbulence and dynamism in the increasingly competitive field. Therefore,
these strategies should allow for flexibility without comprising the company’s objectives or lag
behind time.
As part of the international business level strategy, ExxonMobil as a multinational entity should
pay keen attention to Focused Differentiation. The dispersed global market has lots of
unidentified profitable market niche. The company could provide quality products to such groups
to expand its market reach even in areas deemed to be dominated by rivals (Johnson & Scholes,
2003). ExxonMobil's world leadership should not mean a time to relax for the management.
Instead, it should constantly explore stability strategies to ensure it remains at the top. That
would call for measures to ensure customer retention is achieved, new markets explored and
latest technologies adopted by others. As a multinational entity, there are always opportunities
for growth created by market dynamism in a particular industry. The existence of such
opportunities justifies why ExxonMobil should continually seek excellence and world
leadership.
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REFERENCES
Abraxas Petroleum Corporation. (2017). Annual Report Proxy Statement. San Antonio: Abraxas
Petroleum Corp.
Chapa, S. (2017). Energy: Abraxas Petroleum Corporation. San Antonio Business Journal,
1254(23).
Crilly, W. M., & Sherman, A. J. (2010). The AMA Handbook of Due Diligence (Revised ed.).
Nashville: AMACOM.
DePamphilis, D. (2011). Mergers and Acquisitions Basics . Amsterdam: Elsevier Inc.
ExxonMobil. (2017). Summary Annual Report. Irving: ExxonMobil Corp.
Gaughan, P. A. (2018). Mergers, Acquisitions, and Corporate Restructurings. New Jersey:
Wiley.
Johnson, M., & Scholes, G. (2003). Exploring Corporate Strategy. New Delhi: Prentice Hall.
Wahle, S., & Yokotaki, T. (2017). Chasing rabbits versus stalking mammoths in M&A. Dublin:
Accenture Systems.
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