exxonmobil merger effect

Corporate Financial Management - Msc 11Pre-Course Assignment "ExxonMobil Merger"

1. Merger Motivations

The development of oil industry has been compelled to adapt to the massive change

forces of globalization, transformations, and technological innovations. Oil industry has a

widespread market with 53% of volume multinationally traded and accounts for about

10% of world trade, more than any other commodity. While the market is in range, oil

variety and pipelines needs and other specialized distribution and marketing facilities

result in geographic market segmentation (Weston, 2002).

The motivations of Exxon-Mobil merger completed on 30 Novembar 1999 which reflect

the industry forces described above. By uniting complementary assets, Exxon-Mobil

would have a stronger position in the areas of the world with the highest potential for

future oil and gas discoveries. This mergered company would also be in a more strategical

position to invest in programs involving large expenses with high risks and returns

(Weston, 2002). Exxon has experience in deepwater exploration in West Africa. Mobil has

experience in production and exploration acreage in Nigeria and Equatorial Guinea.

Combining both experience will result in a fringe benefit. In the Caspian region, Exxon’s

strong position in Azerbaijan would unite with Mobil’s similar position in Kazakhstan,

including its significant interest in the Tengiz field, and its position in Turkmenistan.

Complementary exploration and production activities also appeared in South America

and Eastern Canada (Weston, 2002).

Near term operating synergies of $2.8 billion were predicted. Two-thirds of the benefits

come from omitting duplicate facilities and excess capacity. It was expected that the

combined general and administrative costs would also be reduced. Additional synergy

benefits would come from applying each company’s best business practices across their

worldwide operations. In a news release on 8/1/00, ExxonMobil reported that synergies

had reached $4.6 billion. Analyst reports projected synergies would reach $7 billion by

2002 (Deutsche Bank, 2001).

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2. Deal Terms and Event Returns

ExxonMobil merger is a horizontal merger which one firm combines with another in its

same line of business (Brigham and Ehrhardt, 2005). The characteristics of the deal are

set forth in Table 3. Exxon had a market premerger value of $175 billion and $58.7 billion

for Mobil. Exxon had a P/E ratio of about 23.6 versus 17.9 for Mobil. Exxon paid 1.32

shares for each share of Mobil. Since Mobil had 780 million shares outstanding, Exxon

paid 1,030 million shares times the $72 share price of Exxon for a total of $74.2 billion.

This was a 26.4% premium over the $58.7 billion Mobil market cap (Weston, 2002).

Table 3Exxon / Mobil Financial Relations

Exxon MobilMarket Value (billion)(1) $175.00 $58.70 Book Value (billion)(2) $43.70 $19.00 Market Value / Book Value 4 3.1LTM Net Income (million)(3) $7,410 $3,272 PE Ratio 23.6 17.9(1) Market Value as of 11/20/98.

(2) Book Value as of 9/30/98; source 1998 3Q 10Q.

(3) LTM Net Income is through 9/30/98. LTM is Last 12 Months.

(Weston, 2002)

Table 4 shows that premerger, the equity value of Exxon shares represented 74,90% of

the combined market value. The premium paid to Mobil caused the postmerger

proportion of ownership to drop to about 70,20% for Exxon and rise to 29,80% for Mobil.

Weston, 2002).



`Table 4Exxon / Mobil Deal Terms

Pre-Merger Dollar Amounts Percentage Exxon Mobil Total Exxon MobilShare Price(1) $72.00 $75.25 Shares Outstanding (million)(2) 2,431 780

Total Market Value (billion)$175.00

$58.70 $233.7

0 74.90% 25.10%

Exchange Terms 1.32 for 1 Post-Merger Number of Shares (million) 2,431 1,030 3,461 70.20% 29.80%(1) Share Prices as or 11/20/98, a few days before runup in stock prices; announced 12/01/98

(2) Shares Outstanding are as of 1998 3Q 10Qs

(Weston, 2002)

In a range of 5 years after the merger, its success might simply confirmed. Between 1999

and 2004, Exxon Mobil earned $75 billion in profits and generated $123 billion in cash. By

2004, the company was enjoying "unprecedented developments" in Chad, Angola, and

Equatorial Guinea. The history of the company's production portfolio was expected to be

changed substantially by the developments. Africa, the Mideast, and Russia accounted

for less than 20 percent of Exxon Mobil's oil and gas production in 2004. The regions

were expected to account for 40 percent of the firm's oil and gas production by 2010

(Cooper et al, 1998)

3. Managing Change

The unification of Mobil into Exxon expected to deliver cost savings and to combine two

different corporate cultures. Based on its history, Exxon's strengths were in finance and

engineering, while Mobil's strengths were in marketing and deal-making. Exxon was as

rigid as its leader, Lee Raymond, while Noto, "renowned from Riyadh to Jakarta for his

high-octane energy and charm," as Business Week noted in its April 9, 2001 issue,


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personified the more relaxed culture of Mobil. As these two contrast, but potentially

complementary, heritages combined, the corporate personality of Exxon dominated

Exxon Mobil. Throughout the merged company's senior management ranks, Mobil

executives generally served under Exxon executives. In a 2000 financial report, ExxonMobil

discussed how, its post-merger has provided an opportunity to produce improvements in their

finance and operation through decreasing expense, increasing revenue, and significantly, an

improvement in the capital productivity of its main global asset. Benefits are being appeared in all

financial and operating segments. In 2000, near-term synergies from the merger plus the

continued capture of base-business efficiencies result in total $2.5 billion before tax of operating

outlay reductions and increasing revenue. "Revenue enhancements" incorporate initiatives that

upgrade product values, raise production capacity, or reduce raw material and operating costs.

Examples include the utilization of very large crude carriers to supply adjacent refineries,

improvements in feedstock selection and product blending, optimization in the selection and use

of catalysts, and increased capacity utilization. During 2000, revenue enhancements as big as

$900 million and are expected to realized its grow in the following years. (ExxonMobil, 2000).

There are two major components of ExxonMobil's capital productivity scheme, merger

synergies and continuous base efficiencies. ExxonMobil (2000) stated that 'through

investment selectivity, aggressive asset management, reduced working capital

requirements, and continuous refinement of its efficient capital structure, the company is

confident it will deliver the targeted improvements and continue to lead the competition

in returns on capital employed.'

(ExxonMobil, 2000)

As a result of the merger, ExxonMobil expects to improve its return on capital employed by 3-plus

percentage points, relative to what Exxon could have generated on its own.

ExxonMobil's leadership in the development and technology has been strengthened by

the merger. Each company's innovations - such as catalytic cracking, metallocene

catalysts, three-dimensional seismic, and gas-to-liquids — provide a strong base for



future performance improvement through implementations. Research and development

expenses of about $600 million per year target breakthrough and high end technologies

that will further improve the productivity of their human resources and assets

(ExxonMobil, 2000).

4. ExxonMobil Merger Impact

ExxonMobil's cash flow broke a record $29 billion in 2000, almost doubled the 1999. In a

2000 financial report, ExxonMobil stated that "the large cash flow funded over $10 billion

worth of additions to plant and investments, and allowed the company to return

approximately $8 billion to shareholders through dividends and share purchases." The

rapidly increased cash flow allowed the company to paid off $6 billion of debt, while cash

balances increased by $5 billion. As a result, ExxonMobil (2001) noted that "year-end

2000 debt as a percentage of total capital declined to 15 percent and net debt (net of all

cash) as a percentage of net capital was down to 8 percent."

(ExxonMobil, 2000)

Although improvements reached by the merger appear one year later, the opportunity to

evolve capital productivity drove the longer-term merger scheme. The mergered

company has an improved range and scope of opportunities from which to select the

best projects to advance. Additionally, capital enhancements will be maximized in areas

where existing base assets are complementary. As a result, ExxonMobil expects returns



on capital to be at least 3 percentage points higher than Exxon would likely have

achieved on its own (ExxonMobil, 2000).

Graph 1

ExxonMobil Stock Price (Black Line)

(Google Finance, 2010)

Graphs 1 compares ExxonMobil stock price to S&P 500 stock exchange index and other oil

industries stocks during 1990-2008. It clearly difined that the growth trend of ExxonMobil

was resemble or even lower than the market index from 1998 to 2004, which are the

beginning stage of the merger (Ugur et al, 2010).

In 2005, ExxonMobil's stock prices run simultaneously with rising oil prices and result in

annual income profit of US $ 36 billion (up 42% from previous year). This growth rate was

much higher than market index and oil industries index expected. After 2005,

ExxonMobil enhanced its stock price growth. It can be stated that the merger of Exxon

and Mobil is a successful merger for both company long-term economic growth (Ugur et

al, 2010).



BIBLIOGRAPHY

Cooper, Christopher, and Steve Liesman, "Exxon Agrees to Buy Mobil for $75.3 Billion," Wall Street Journal, December 2, 1998, p. A3.

Weston, J. Fred (2002): 'The Exxon-Mobil Merger: An Archetype', Forthcoming Journal of Applied Finance, Financial Management Association, 3-45

Zhang, H., Demir, U., and Wang, Q. 2010. Managing Investment Group Report, http://www.ugurdemir.info. [17 November 2010]

Google, 2010. ExxonMobil versus S&P 500 Stock Exchange Index, http://www.google.com/finance [18 November 2010]

ExxonMobil Corporation (2000): 2000 Financial and Operating Review, Texas : ExxonMobil Corporation Investor Relations

Eugene F. Brigham & Michael C. Ehrhardt (2005) : Financial Management Theory and Practice, 11th edition, Ohio: South Western


http://www.ugurdemir.info/

exxonmobil merger effect

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