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1 | P a g e
Investment Banking Assignment 3
Mergersand
Acquisitionof
Exxonand Mobil
Compiled by,
Alfred Rodrigues (11)
PGPM 2016
2 | P a g e
Contents
Exxon Mobil Merger...........................................................................................................................3
Exxon Corporation Profile ..................................................................................................................3
Mobil Corporation Profile...................................................................................................................4
Pre-deal events..................................................................................................................................4
Ratios overview.................................................................................................................................5
Deal structure....................................................................................................................................6
Valuation...........................................................................................................................................7
Synergy..............................................................................................................................................8
Analysis.............................................................................................................................................9
Strategic Benefits of the Merger.........................................................................................................9
New Company after Merger.............................................................................................................10
Key Merger Parameters....................................................................................................................10
References.......................................................................................................................................11
3 | P a g e
Exxon Mobil Merger
The acquisition of Mobil Corporation by Exxon Corporation is one of the largest mergers in the
history of the oil industry and rejoins the two largest of the companies that resulted from the
1911 breakup of the Standard Oil Trust. According to Merger stat, this merger has a value of
$77.213 billion and is the largest merger and acquisition (M&A) deal of 1998. This analysis
reviews available industry and company data and determines the valuation is reasonable, given
the financial and operating synergies of the companies. This analysis discusses the industry and
company background of the companies; valuation of the merger, using the comparative
companies, formula, and Rappaport approaches; and then analyzes the strategic benefits, value
factors, and risks of merging the Exxon and Mobil corporations.
Exxon Corporation Profile
One of the world’s largest companies, Exxon has operations throughout the petroleum industry,
from exploring for and producing oil and natural gas in 26 countries to refining and marketing
operations in 76 countries. Exxon operates the world’s third largest petrochemical company and
is the world’s largest independent (non-utility) power producer and has a major presence in coal
and minerals. Because of the cyclical nature of these businesses, their relative contributions vary
widely from year to year. Exxon is second only to Royal Dutch/Shell in terms of the size of its oil
and gas reserves: 6.2 billion barrels of crude oil and 26.1 trillion cubic feet of natural gas as of the
end of 1997. This is about 14 years of production capability, a total well above the industry
average that shows Exxon ’s strength relative to its major competitors. Results in 1997 were
mixed. Lower oil and gas production and lower oil prices led to a 7.2% decline in exploration and
production profits. However, refining and marketing earnings more than doubled, aided by the
company’s highest petroleum product sales volumes in 23 years and improved margins.
Chemicals profits rose 14%, on higher volumes and improved margins with an overall increase in
net income of 13% for 1997. Despite its massive capital budget, Exxon has not only paid, but
raised its dividend in each of the past 14 years. The dividend yield was 2.3% as of late October
1998, compared to the benchmark S&P 500 yield of about 1.5. Exxon’s corporate culture is best
described by the slogan “put a tiger your tank.” Efficiency oriented, Exxon puts a lot of emphasis
on the quality of the product itself.Its corporate imageis built on the power of its products which
is also the focus of its marketing campaign. This rather conservative corporate culture helped in
maintaining its stock resilient despite the problems of the industry. In comparison to other
companies, Exxon has low debt and relatively highliquidity. The low cost of production that Exxon
has attained is enviable. However, its conservatism prevented Exxon from replenishing its
reserves in Asia, Europe, Canada and elsewhere. In addition, Exxon failed to get involved in some
of the most exciting areas of global oil exploration in the Caspian Sea region. Exxon pays a lot
attention in the downstream operations but lacks creativity in upstream operations. The
corporate structure is rather hierarchical and conservative, yet evidently efficient.
4 | P a g e
Mobil Corporation Profile
Mobil Corporation, one of the world’s largest oil companies, set for itself the ambitious goal to
achieve an annual earnings growth in excess of 10% over the next five years. The company
expects to achieve this by increasing oil and gas production, petroleum product sales and
chemicals sales, all while cutting costs. Like Exxon, Mobil is involved in all aspects of the oil
industry, including exploration, production, refining and marketing, as well as being a major
presence in the petrochemicals industry. In 1997, its worldwide net crude and natural gas liquids
production averaged 928,000 barrels per day, up from 854,000 barrels per day in 1996, with U.S.
production accounting for 26% of 1997 production. Mobil’s net natural gas production was 4.56
billion cubic feet per day, of which 25% was produced in the U.S. Mobil’s refinery runs totaled
2,191,000 barrels per day, and petroleum product sales were 3,337,000 barrels per day. Mobil
concentrates its products on high-margin areas,where it is aleader, including synthetic lubricants
and premium gasolines.Mobil’s proven reserves make it one of the world’s five largestnon state-
owned oil companies. Mobil’s chemical business makes and markets basic petrochemicals and
leads the field in production and sales of polypropylene film, a food packaging product. Mobil’s
specialty products include synthetic lubricant base stocks and additives for fuels and lubricants.
Mobil expects significant additional ethylene capacity to come on line in the U.S. in 1998, and its
paraxylene capacity began operations in 1997. Mobil puts a lot of emphasis on exploration and
research. In January 1998, Mobil announced that its capital and exploration budget for 1998
would total $5.9 billion, up from $5.3 billion in 1997. Of its total 1998 budget, $3.9 billion was
allocated for exploration and production, $1.5 billion for refining and marketing, $0.4 billion for
chemicals,and $0.1 billion for corporate activities.Mobil is a company that values innovation and
quality. It has invested on building a corporate image that combines friendliness to the
environment and product quality. It is the energy that makes the difference. The overall culture
is liberal. The management tries to create a climate of high performance and continuous
improvement throughout the organization.
Pre-deal events
Date Event Description Type
16-Jun-98 CEOs’meeting
Preliminary discussions about the possibility of the
merger
Privat
e
11-Aug-98
BP-Amoco
merger
Companies announced the terms of their merger
agreement Public
15-Aug-98
Mobil hires
Goldman
Sachs
Mobil asked Goldman Sachs to undertake an analysis of
strategic alternatives available to Mobil. Merger with
Exxon presented as one of the main options
Privat
e
19-Oct-98 CEOs’meeting
Parties reviewed the possible relative ownership ranges
and expanded the discussions to include such issues as
the representation of current Mobil directors on the
board of the combined company
Privat
e
5 | P a g e
1-Oct-98 Due diligence
Exchanged due diligence request lists and
representatives. Conducted reciprocal legal, business,
accounting and financial due diligence
Privat
e
26-Nov-98
CEOs’ phone
discussion
CEOs spokeby telephone to discuss reports in the media
about a possible transaction between Exxon and Mobil
Privat
e
27-Nov-98
Joint
statement
Exxon and Mobil issued a joint statement confirming
that the two companies were in discussions ofapossible
merger Public
1-Dec-98
Official
merger
agreement
Following the approval of their Boards, Exxon and Mobil
officially signed an agreement and plan of merger Public
19-Apr-99
FTC approval
of BP-Amoco
merger and
Shell-Texaco
merger
FTC granted approvals for two largeoil industry mergers
BP-Amoco and Shell-Texaco with divestitures and other
relief to preserve competition Public
27-May-
99
Shareholders’
approval
Shareholders of both Exxon and Mobil approved the
merger. More than 99 percent of the shares in Exxon
were voted in favor of the deal, as were 98.2 percent of
Mobil shares Public
29-Sep-99
EU
Commission
approval
European Commission granted an antitrust approval
with requirement of divestitures and breakup of BP
Amoco/Mobil joint venture Public
30-Nov-99
FTC approval
and merger
completion
FTC accepted an antitrust settlement with large retail
divestiture. Merger completed. Mobil became a wholly
owned subsidiary of Exxon Public
Ratios overview
Exxon had better return on assets (6.75 percent) and return on equity (14.57 percent) ratios
(Mobil’s were 3.95 percent and 9.01 percent correspondingly). This situation represented Exxon’s
better efficiency at using investment funds (shareholder’s equity) to generate earnings growth.
Exxon was more stable and effective in using its assets, while Mobil was more volatile and risky.
During 1983–1999 Exxon was superior with the exception of 1989, when tanker Exxon Valdez
disaster happened and cut profits of the company.
Companies had equal gross margin (38.7 percent vs. 38.52 percent), but Exxon had higher gross
operating margin (7.9 percent) and profit margin (5.4 percent) ratios than Mobil (6.56 percent
and 3.18 percent correspondingly) which means that Exxon was better in cost-cutting and
controlling its expenses. But in some cases low operating expenses can damage long-term
profitability and competitiveness of the company.
6 | P a g e
Liquidity ratios show that both companies were financially stable, but Exxon was in a better
situation than Mobil. The Exxon’s current and quick ratios (0.57 and 0.91 correspondingly) were
higher than the Mobil’s (0.48 and 0.67 correspondingly) and merged company had significantly
improved these results. Ratio of net current assets as a percent of total assets (i.e.working
capital to total assets) was distorted after the merger (1.48) probably due to
large divestitures that followed the deal.
Solvency status of companies also looked good. Though Exxon again showed its financial
supremacy with much higher interest coverage ratio (93.41 compared to Mobil’s 7.78) Generally
speaking the better interest coverage ratio means less risk but also might be bad for future
performance becauseof the failure of the management to use additional funds for development.
Debt to equity ratio was safe and stable in both companies.
Combined company showed even superior results after the merger, which proved the correlation
between positive market reaction on the announcement event and success of the merger.
Deal structure
Under the mergeragreement,anExxonsubsidiarywouldmerge intoMobil sothatMobil becomesa
whollyownedsubsidiaryof ExxonMobil.
As a result,
Exxon would hold 100 percent of Mobil’s issued and outstanding voting securities.
Holders of Mobil common stock would receive 1.32015 shares of Exxon common stock for
each share of Mobil common stock.
5 days before the announcement Exxon shares price was $72 and 2,431 million shares
outstanding ($175 billion market value) compared with $75.25 a share and 779.8 million shares
outstanding for Mobil ($58.7 billion market value).
With the Exchange ratio 1.32015, Exxon paid 1,029.4 million of its shares for Mobil or $74.1
billion. This was a $15.4 billion (26.2 percent) premium over Mobil’s market value or $94.9 a
share.
After the price run-up Exxon shareholders would own approximately 70 percent of the combined
ExxonMobil entity, while Mobil shareholders would own approximately 30 percent. The merger
qualified as a tax-free reorganization in the US, and that it was accounted for on a “pooling of
interests” basis.
In addition, the merger agreement provided for payment of termination fees of $1.5 billion.
Exxon and Mobil also entered into an option agreement that granted Exxon the option to
purchase up to 136.5 million shares (14.9 percent) of Mobil common stock at a strike price of
$95.96.
7 | P a g e
Exxon could exercise the option after the occurrence of an event, entitling Exxon to receive the
termination fee payable by Mobil.
The termination fee and option were intended to make it more likely that the merger would be
completed on the agreed terms and to discourage proposals for alternative business
combinations. Among other effects, the option could prevent an alternative business
combination with Mobil from being accounted for as a “pooling of interests”. Although
companies introduced protection against hostile takeover, they didn’t use any collar to protect
shareholders. J.P. Morgan & Co. andDavis Polk & Wardwell advised Exxon, and Goldman Sachs &
Co. and Skadden, Arps, Meagher & Flom advised Mobil.
Valuation
J.P. Morgan performed traditional P/E analysis. Such analysis indicated that Mobil had been
trading at an 8 percent to 15 percent discount to Exxon. J.P. Morgan's analysis indicated that if
Mobil were to be valued at price to multiples comparable to those of Exxon, there would be an
enhancement of value to its shareholders of approximately $11 billion.
Goldman Sachs also reviewed and compared ratios and public market multiples relating to Mobil
to following six publicly traded companies:
 British Petroleum Co. PLC,
 Chevron Corp.,
 Exxon,
 Royal Dutch Petroleum Co.,
 Shell Transport & Trading Co. PLC,
 Texaco Inc.
P/E multiple for these firms ranged 19.3–23.8. The analysis showed that Mobil was
undervalued5to16percent,relativetocomparablewithfairprice$79–$89a share.It’s needed
to notice that comparable analysis couldn’t capture the synergy effect, value creation and
differences.Simple DCF analysis ofMobilas a standalonecompanygivesrangeofintrinsicvalue
of $59.8–$79.5 billion or $76.7–102 per share depending on cash flow growth rate.
DCF analysis, based on the estimated pre-tax synergies of $2.8 billion expected to result from
the merger, suggested a potential value creation in the short term of approximately $22–25
billion. J.P. Morgan's review suggested that over the long term, the potential for value creation
from these elements could be as much as $47–57 billion. So Mobil intrinsic value for this deal
was $95–$118.8 a share depending on growth rate.
Since Exxon's market capitalization was significantly larger than Mobil's, Exxon's shareholders
would have enjoyed a greater proportion of the value creation if no premium were paid by Exxon
8 | P a g e
in the merger. By offering a premium to Mobil's shareholders, this potential value creation was
instead shared in approximately equal proportions between the companies' shareholders and
such sharing was deemed to be a reasonable allocation of value creation. J.P. Morgan's analysis
showed that for transactions involving smaller companies with a relative market capitalization
comparable to that of Mobil pre-announcement, a premium of 15 percent to 25 percent matched
market precedent. In comparison, BP paid 35 percent premium for Amoco.
10 days before the completion of the merger, Exxon market value was $184.5 billion ($76 a
share) and Mobil – $77.1 billion ($98.5 a share). Pro forma market value of merged company
was $261.6 billion. Right after the merger was completed, the share price of combined Exxon-
Mobil was $80.56 with 3,461.5 million shares outstanding, which gave $278.8 billion market
valueor$17.2 billionofadditionalvaluecreated.This figure would be even higher if we consider
pre-announcement pro forma combined market value of $233.7 billion. In this casecreated value
reaches $45.1 billion.
Synergy
The motivations for the Exxon-Mobil merger reflected the industry forces. Companies needed a
secure presence in the regions with high potential for oil/gas discoveries and stronger position
to make large investments. The benefits of the merger fell broadly in two categories: near-term
operating synergies and capital productivity improvements.
Near-term operating synergies. $2.8 billion in annual pre-tax benefits from
operating synergies (increases in production, sales and efficiency, decreases in unit costs and
combining complementary operations). Management expected to realize the full benefits by the
third year after the merger. During the first two years, the benefits should have been partly offset
by one-time costs at $2 billion for business integration. The firms alsoplanned to eliminate about
9,000 jobs. A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion.
Capital productivity improvements. Management also believed the combined company could
use its capital more profitably than either company on its own. These improvements were
realized due to efficiencies of scale, cost savings, and sharing of best management practices. The
businesses and assets of Exxon and Mobil were highly complementary in key areas. In the
exploration and production area, for example, Mobil's and Exxon's respective strengths in West
Africa, the Caspian region, Russia, South America, and North America lined up well, with minimal
overlap. The firms also had a presence in natural gas, with combined sales of about 14 bcfd. And
Mobil contributed its LNG assets and experience to the venture.
There were technology synergies as well. In upstream, Exxon and Mobil owned proprietary
technologies in the areas of: deep water and arctic operations, heavy oil, gas-to-liquids
processing, LNG, and high-strength steel. In downstream, their proprietary technology focused
on refining and chemical catalysts. Exxon’s lube base stocks production fitted well with Mobil's
leadership in lubes marketing. Generally, the Exxon-Mobil deal was a move by the dominant
partner to increase its asset base by 30 percent while raising capital productivity.
9 | P a g e
Analysis
Overall, companies in the oil industry are struggling to survive the lowest crude oil prices in over
a decade. With March 1999 crude oil futures trading under $12 per barrel, profits for industry
members are being squeezed severely. the financial situation in emerging markets, where much
of the world’s oil is produced, have led state-operated oil companies to produce and sell all oil
they can in an effort to earn as much foreign currency as possible while these producers would
like to raise prices by limiting production, they have been unable to act in concert due to the high
economic incentives of cheating on any cartel-established production limits.
Strategic Benefits of the Merger
In this environment of low prices, the companies that will be most profitable are those that can
make themselves the most efficient. Exxon, as the largest U.S. oil producer has been effective at
cutting waste and streamlining its operations, and it has achieved significant economies of scale.
However, it is reaching the limit in this streamlining, where the marginal cost of further
improvement is beginning to equal or exceed the savings produced. As a result, Exxon must
achieve substantial growth to be able to achieve more scale economies.
In addition, in its quest for efficiency, Exxon has fallen behind in research and development on
several fronts, notably its upstream processes for extracting oil from lower-grade oil fields and
its downstream manufacturing of improved lubricants, both areas where Mobil has made
significant breakthroughs. Mobil pioneered the carbon dioxide (CO2) injection process and is an
industry leader in this technique for extending the life of existing oil fields and opening up fields
whose yield would otherwise be too low for profitability. Mobil is also leading the development
of groundbreaking lubricants, such as Mobil, extending the life of automobile and industrial
equipment by reducing wear on engine parts.
A third reason why Exxon is interested in merging with Mobil is because the industry expects
Saudi Arabia to reopen its oil fields and operations to foreign companies. Even though they have
the most productive oil fields in the world, Saudi oil operations are suffering from technological
obsolescence. Industry observers expect the Saudis to begin seeking production partners within
the next few years to reduce their risks and streamline their operations. By merging with Mobil,
Exxon would become large enough that it may be able to convince the Saudis that it can manage
a joint venture with Saudi Arabian oil officials rather than being part of a large syndicate. In
addition, in the past, Mobil performed substantial work with the Saudi Oil Ministry and several
of its executives have close ties with Saudi officials.
10 | P a g e
New Company after Merger
The value range for Mobil, as a standalone company is between $59 and $78 billion, as shown in
the comparative company valuations above, and the combined company, Exxon Mobil, the value
range is between $209 and $245 billion.
ExxonMobil markets products around the world under the brands of Exxon, Mobil, and Esso.
Mobil is ExxonMobil's primary retail gasoline brand in California, Florida, New York, New
England, the Great Lakes and the Midwest. Exxon is the primary brand in the rest of the United
States, with the highest concentration of retail outlets located in New Jersey, Pennsylvania,
Texas and in the Mid-Atlantic and Southeastern states. Esso is ExxonMobil's primary gasoline
brand worldwide except in Australia and New Zealand, where the Mobil brand is used
exclusively. In Colombia, both the Esso and Mobil brands are used.
The upstream division dominates the company's cashflow, accounting for approximately 70
percent of revenue. The company employs over 82,000 people worldwide, as indicated in
ExxonMobil's 2006 Corporate Citizen Report, with approximately 4,000 employees in its Fairfax
downstream headquarters and 27,000 people in its Houston upstream headquarters.
ExxonMobil is organized functionally into a number of global operating divisions. These
divisions are grouped into three categories for reference purposes, though the company also
has several ancillary divisions, such as Coal & Minerals, which are stand alone. It also owns
hundreds of smaller subsidiaries such as Imperial Oil Limited (69.6 percent ownership) in
Canada, and SeaRiver Maritime, a petroleum shipping company.
Key Merger Parameters
Sr. No. Particulars Value
Exxon Corp. Parameters before Merger
1 Revenue of Exxon(before merger) 132839 (million dollars)
2 OtherIncome of Exxon(before merger) 2303 (million dollars)
3
Earningsfromequityinterestsandother
revenue 2100 (million dollars)
3 PBT of Exxon(before merger) 12,798 (million dollars)
4 PAT of Exxon(before merger) 8,460(million dollars)
5 ProductionCapacityof Exxon(before merger)
6.2 billion barrels of crude oil and 26.1
trillion cubic feet of natural gas as of
the end of 1997
Mobil Corp. Parameters before Merger
6 Revenue of Mobil (before merger) 64327 (million dollars)
7 OtherIncome of Mobil (before merger) 1579 (milliondollars)
8 PBT of Mobil (before merger) 49,035 (milliondollars)
9 PAT of Mobil (before merger) 3,272 (milliondollars)
11 | P a g e
10 ProductionCapacityof Mobil (before merger) 928,000 barrels per day
11 Exchange Ratio 1.32015
12 Cash payment(if any) N/A
13 Newcompanyaftermerger Exxon Mobil
References
1. ExxonFinancial Statementspre-merger-
http://www.sec.gov/Archives/edgar/data/34088/0000930661-99-000626.txt
2. ExxonFinancial Statementspre-merger- http://www.secinfo.com/dSAKe.61Z3.htm
3. http://research.omicsgroup.org/index.php/ExxonMobil
4. Analysisof the ExxonMobil MergerbyBob Penn& Raphael SandaltzopoulosFebruary4,1999.

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Merger of ExxonMobil Corporation v2

  • 1. 1 | P a g e Investment Banking Assignment 3 Mergersand Acquisitionof Exxonand Mobil Compiled by, Alfred Rodrigues (11) PGPM 2016
  • 2. 2 | P a g e Contents Exxon Mobil Merger...........................................................................................................................3 Exxon Corporation Profile ..................................................................................................................3 Mobil Corporation Profile...................................................................................................................4 Pre-deal events..................................................................................................................................4 Ratios overview.................................................................................................................................5 Deal structure....................................................................................................................................6 Valuation...........................................................................................................................................7 Synergy..............................................................................................................................................8 Analysis.............................................................................................................................................9 Strategic Benefits of the Merger.........................................................................................................9 New Company after Merger.............................................................................................................10 Key Merger Parameters....................................................................................................................10 References.......................................................................................................................................11
  • 3. 3 | P a g e Exxon Mobil Merger The acquisition of Mobil Corporation by Exxon Corporation is one of the largest mergers in the history of the oil industry and rejoins the two largest of the companies that resulted from the 1911 breakup of the Standard Oil Trust. According to Merger stat, this merger has a value of $77.213 billion and is the largest merger and acquisition (M&A) deal of 1998. This analysis reviews available industry and company data and determines the valuation is reasonable, given the financial and operating synergies of the companies. This analysis discusses the industry and company background of the companies; valuation of the merger, using the comparative companies, formula, and Rappaport approaches; and then analyzes the strategic benefits, value factors, and risks of merging the Exxon and Mobil corporations. Exxon Corporation Profile One of the world’s largest companies, Exxon has operations throughout the petroleum industry, from exploring for and producing oil and natural gas in 26 countries to refining and marketing operations in 76 countries. Exxon operates the world’s third largest petrochemical company and is the world’s largest independent (non-utility) power producer and has a major presence in coal and minerals. Because of the cyclical nature of these businesses, their relative contributions vary widely from year to year. Exxon is second only to Royal Dutch/Shell in terms of the size of its oil and gas reserves: 6.2 billion barrels of crude oil and 26.1 trillion cubic feet of natural gas as of the end of 1997. This is about 14 years of production capability, a total well above the industry average that shows Exxon ’s strength relative to its major competitors. Results in 1997 were mixed. Lower oil and gas production and lower oil prices led to a 7.2% decline in exploration and production profits. However, refining and marketing earnings more than doubled, aided by the company’s highest petroleum product sales volumes in 23 years and improved margins. Chemicals profits rose 14%, on higher volumes and improved margins with an overall increase in net income of 13% for 1997. Despite its massive capital budget, Exxon has not only paid, but raised its dividend in each of the past 14 years. The dividend yield was 2.3% as of late October 1998, compared to the benchmark S&P 500 yield of about 1.5. Exxon’s corporate culture is best described by the slogan “put a tiger your tank.” Efficiency oriented, Exxon puts a lot of emphasis on the quality of the product itself.Its corporate imageis built on the power of its products which is also the focus of its marketing campaign. This rather conservative corporate culture helped in maintaining its stock resilient despite the problems of the industry. In comparison to other companies, Exxon has low debt and relatively highliquidity. The low cost of production that Exxon has attained is enviable. However, its conservatism prevented Exxon from replenishing its reserves in Asia, Europe, Canada and elsewhere. In addition, Exxon failed to get involved in some of the most exciting areas of global oil exploration in the Caspian Sea region. Exxon pays a lot attention in the downstream operations but lacks creativity in upstream operations. The corporate structure is rather hierarchical and conservative, yet evidently efficient.
  • 4. 4 | P a g e Mobil Corporation Profile Mobil Corporation, one of the world’s largest oil companies, set for itself the ambitious goal to achieve an annual earnings growth in excess of 10% over the next five years. The company expects to achieve this by increasing oil and gas production, petroleum product sales and chemicals sales, all while cutting costs. Like Exxon, Mobil is involved in all aspects of the oil industry, including exploration, production, refining and marketing, as well as being a major presence in the petrochemicals industry. In 1997, its worldwide net crude and natural gas liquids production averaged 928,000 barrels per day, up from 854,000 barrels per day in 1996, with U.S. production accounting for 26% of 1997 production. Mobil’s net natural gas production was 4.56 billion cubic feet per day, of which 25% was produced in the U.S. Mobil’s refinery runs totaled 2,191,000 barrels per day, and petroleum product sales were 3,337,000 barrels per day. Mobil concentrates its products on high-margin areas,where it is aleader, including synthetic lubricants and premium gasolines.Mobil’s proven reserves make it one of the world’s five largestnon state- owned oil companies. Mobil’s chemical business makes and markets basic petrochemicals and leads the field in production and sales of polypropylene film, a food packaging product. Mobil’s specialty products include synthetic lubricant base stocks and additives for fuels and lubricants. Mobil expects significant additional ethylene capacity to come on line in the U.S. in 1998, and its paraxylene capacity began operations in 1997. Mobil puts a lot of emphasis on exploration and research. In January 1998, Mobil announced that its capital and exploration budget for 1998 would total $5.9 billion, up from $5.3 billion in 1997. Of its total 1998 budget, $3.9 billion was allocated for exploration and production, $1.5 billion for refining and marketing, $0.4 billion for chemicals,and $0.1 billion for corporate activities.Mobil is a company that values innovation and quality. It has invested on building a corporate image that combines friendliness to the environment and product quality. It is the energy that makes the difference. The overall culture is liberal. The management tries to create a climate of high performance and continuous improvement throughout the organization. Pre-deal events Date Event Description Type 16-Jun-98 CEOs’meeting Preliminary discussions about the possibility of the merger Privat e 11-Aug-98 BP-Amoco merger Companies announced the terms of their merger agreement Public 15-Aug-98 Mobil hires Goldman Sachs Mobil asked Goldman Sachs to undertake an analysis of strategic alternatives available to Mobil. Merger with Exxon presented as one of the main options Privat e 19-Oct-98 CEOs’meeting Parties reviewed the possible relative ownership ranges and expanded the discussions to include such issues as the representation of current Mobil directors on the board of the combined company Privat e
  • 5. 5 | P a g e 1-Oct-98 Due diligence Exchanged due diligence request lists and representatives. Conducted reciprocal legal, business, accounting and financial due diligence Privat e 26-Nov-98 CEOs’ phone discussion CEOs spokeby telephone to discuss reports in the media about a possible transaction between Exxon and Mobil Privat e 27-Nov-98 Joint statement Exxon and Mobil issued a joint statement confirming that the two companies were in discussions ofapossible merger Public 1-Dec-98 Official merger agreement Following the approval of their Boards, Exxon and Mobil officially signed an agreement and plan of merger Public 19-Apr-99 FTC approval of BP-Amoco merger and Shell-Texaco merger FTC granted approvals for two largeoil industry mergers BP-Amoco and Shell-Texaco with divestitures and other relief to preserve competition Public 27-May- 99 Shareholders’ approval Shareholders of both Exxon and Mobil approved the merger. More than 99 percent of the shares in Exxon were voted in favor of the deal, as were 98.2 percent of Mobil shares Public 29-Sep-99 EU Commission approval European Commission granted an antitrust approval with requirement of divestitures and breakup of BP Amoco/Mobil joint venture Public 30-Nov-99 FTC approval and merger completion FTC accepted an antitrust settlement with large retail divestiture. Merger completed. Mobil became a wholly owned subsidiary of Exxon Public Ratios overview Exxon had better return on assets (6.75 percent) and return on equity (14.57 percent) ratios (Mobil’s were 3.95 percent and 9.01 percent correspondingly). This situation represented Exxon’s better efficiency at using investment funds (shareholder’s equity) to generate earnings growth. Exxon was more stable and effective in using its assets, while Mobil was more volatile and risky. During 1983–1999 Exxon was superior with the exception of 1989, when tanker Exxon Valdez disaster happened and cut profits of the company. Companies had equal gross margin (38.7 percent vs. 38.52 percent), but Exxon had higher gross operating margin (7.9 percent) and profit margin (5.4 percent) ratios than Mobil (6.56 percent and 3.18 percent correspondingly) which means that Exxon was better in cost-cutting and controlling its expenses. But in some cases low operating expenses can damage long-term profitability and competitiveness of the company.
  • 6. 6 | P a g e Liquidity ratios show that both companies were financially stable, but Exxon was in a better situation than Mobil. The Exxon’s current and quick ratios (0.57 and 0.91 correspondingly) were higher than the Mobil’s (0.48 and 0.67 correspondingly) and merged company had significantly improved these results. Ratio of net current assets as a percent of total assets (i.e.working capital to total assets) was distorted after the merger (1.48) probably due to large divestitures that followed the deal. Solvency status of companies also looked good. Though Exxon again showed its financial supremacy with much higher interest coverage ratio (93.41 compared to Mobil’s 7.78) Generally speaking the better interest coverage ratio means less risk but also might be bad for future performance becauseof the failure of the management to use additional funds for development. Debt to equity ratio was safe and stable in both companies. Combined company showed even superior results after the merger, which proved the correlation between positive market reaction on the announcement event and success of the merger. Deal structure Under the mergeragreement,anExxonsubsidiarywouldmerge intoMobil sothatMobil becomesa whollyownedsubsidiaryof ExxonMobil. As a result, Exxon would hold 100 percent of Mobil’s issued and outstanding voting securities. Holders of Mobil common stock would receive 1.32015 shares of Exxon common stock for each share of Mobil common stock. 5 days before the announcement Exxon shares price was $72 and 2,431 million shares outstanding ($175 billion market value) compared with $75.25 a share and 779.8 million shares outstanding for Mobil ($58.7 billion market value). With the Exchange ratio 1.32015, Exxon paid 1,029.4 million of its shares for Mobil or $74.1 billion. This was a $15.4 billion (26.2 percent) premium over Mobil’s market value or $94.9 a share. After the price run-up Exxon shareholders would own approximately 70 percent of the combined ExxonMobil entity, while Mobil shareholders would own approximately 30 percent. The merger qualified as a tax-free reorganization in the US, and that it was accounted for on a “pooling of interests” basis. In addition, the merger agreement provided for payment of termination fees of $1.5 billion. Exxon and Mobil also entered into an option agreement that granted Exxon the option to purchase up to 136.5 million shares (14.9 percent) of Mobil common stock at a strike price of $95.96.
  • 7. 7 | P a g e Exxon could exercise the option after the occurrence of an event, entitling Exxon to receive the termination fee payable by Mobil. The termination fee and option were intended to make it more likely that the merger would be completed on the agreed terms and to discourage proposals for alternative business combinations. Among other effects, the option could prevent an alternative business combination with Mobil from being accounted for as a “pooling of interests”. Although companies introduced protection against hostile takeover, they didn’t use any collar to protect shareholders. J.P. Morgan & Co. andDavis Polk & Wardwell advised Exxon, and Goldman Sachs & Co. and Skadden, Arps, Meagher & Flom advised Mobil. Valuation J.P. Morgan performed traditional P/E analysis. Such analysis indicated that Mobil had been trading at an 8 percent to 15 percent discount to Exxon. J.P. Morgan's analysis indicated that if Mobil were to be valued at price to multiples comparable to those of Exxon, there would be an enhancement of value to its shareholders of approximately $11 billion. Goldman Sachs also reviewed and compared ratios and public market multiples relating to Mobil to following six publicly traded companies:  British Petroleum Co. PLC,  Chevron Corp.,  Exxon,  Royal Dutch Petroleum Co.,  Shell Transport & Trading Co. PLC,  Texaco Inc. P/E multiple for these firms ranged 19.3–23.8. The analysis showed that Mobil was undervalued5to16percent,relativetocomparablewithfairprice$79–$89a share.It’s needed to notice that comparable analysis couldn’t capture the synergy effect, value creation and differences.Simple DCF analysis ofMobilas a standalonecompanygivesrangeofintrinsicvalue of $59.8–$79.5 billion or $76.7–102 per share depending on cash flow growth rate. DCF analysis, based on the estimated pre-tax synergies of $2.8 billion expected to result from the merger, suggested a potential value creation in the short term of approximately $22–25 billion. J.P. Morgan's review suggested that over the long term, the potential for value creation from these elements could be as much as $47–57 billion. So Mobil intrinsic value for this deal was $95–$118.8 a share depending on growth rate. Since Exxon's market capitalization was significantly larger than Mobil's, Exxon's shareholders would have enjoyed a greater proportion of the value creation if no premium were paid by Exxon
  • 8. 8 | P a g e in the merger. By offering a premium to Mobil's shareholders, this potential value creation was instead shared in approximately equal proportions between the companies' shareholders and such sharing was deemed to be a reasonable allocation of value creation. J.P. Morgan's analysis showed that for transactions involving smaller companies with a relative market capitalization comparable to that of Mobil pre-announcement, a premium of 15 percent to 25 percent matched market precedent. In comparison, BP paid 35 percent premium for Amoco. 10 days before the completion of the merger, Exxon market value was $184.5 billion ($76 a share) and Mobil – $77.1 billion ($98.5 a share). Pro forma market value of merged company was $261.6 billion. Right after the merger was completed, the share price of combined Exxon- Mobil was $80.56 with 3,461.5 million shares outstanding, which gave $278.8 billion market valueor$17.2 billionofadditionalvaluecreated.This figure would be even higher if we consider pre-announcement pro forma combined market value of $233.7 billion. In this casecreated value reaches $45.1 billion. Synergy The motivations for the Exxon-Mobil merger reflected the industry forces. Companies needed a secure presence in the regions with high potential for oil/gas discoveries and stronger position to make large investments. The benefits of the merger fell broadly in two categories: near-term operating synergies and capital productivity improvements. Near-term operating synergies. $2.8 billion in annual pre-tax benefits from operating synergies (increases in production, sales and efficiency, decreases in unit costs and combining complementary operations). Management expected to realize the full benefits by the third year after the merger. During the first two years, the benefits should have been partly offset by one-time costs at $2 billion for business integration. The firms alsoplanned to eliminate about 9,000 jobs. A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion. Capital productivity improvements. Management also believed the combined company could use its capital more profitably than either company on its own. These improvements were realized due to efficiencies of scale, cost savings, and sharing of best management practices. The businesses and assets of Exxon and Mobil were highly complementary in key areas. In the exploration and production area, for example, Mobil's and Exxon's respective strengths in West Africa, the Caspian region, Russia, South America, and North America lined up well, with minimal overlap. The firms also had a presence in natural gas, with combined sales of about 14 bcfd. And Mobil contributed its LNG assets and experience to the venture. There were technology synergies as well. In upstream, Exxon and Mobil owned proprietary technologies in the areas of: deep water and arctic operations, heavy oil, gas-to-liquids processing, LNG, and high-strength steel. In downstream, their proprietary technology focused on refining and chemical catalysts. Exxon’s lube base stocks production fitted well with Mobil's leadership in lubes marketing. Generally, the Exxon-Mobil deal was a move by the dominant partner to increase its asset base by 30 percent while raising capital productivity.
  • 9. 9 | P a g e Analysis Overall, companies in the oil industry are struggling to survive the lowest crude oil prices in over a decade. With March 1999 crude oil futures trading under $12 per barrel, profits for industry members are being squeezed severely. the financial situation in emerging markets, where much of the world’s oil is produced, have led state-operated oil companies to produce and sell all oil they can in an effort to earn as much foreign currency as possible while these producers would like to raise prices by limiting production, they have been unable to act in concert due to the high economic incentives of cheating on any cartel-established production limits. Strategic Benefits of the Merger In this environment of low prices, the companies that will be most profitable are those that can make themselves the most efficient. Exxon, as the largest U.S. oil producer has been effective at cutting waste and streamlining its operations, and it has achieved significant economies of scale. However, it is reaching the limit in this streamlining, where the marginal cost of further improvement is beginning to equal or exceed the savings produced. As a result, Exxon must achieve substantial growth to be able to achieve more scale economies. In addition, in its quest for efficiency, Exxon has fallen behind in research and development on several fronts, notably its upstream processes for extracting oil from lower-grade oil fields and its downstream manufacturing of improved lubricants, both areas where Mobil has made significant breakthroughs. Mobil pioneered the carbon dioxide (CO2) injection process and is an industry leader in this technique for extending the life of existing oil fields and opening up fields whose yield would otherwise be too low for profitability. Mobil is also leading the development of groundbreaking lubricants, such as Mobil, extending the life of automobile and industrial equipment by reducing wear on engine parts. A third reason why Exxon is interested in merging with Mobil is because the industry expects Saudi Arabia to reopen its oil fields and operations to foreign companies. Even though they have the most productive oil fields in the world, Saudi oil operations are suffering from technological obsolescence. Industry observers expect the Saudis to begin seeking production partners within the next few years to reduce their risks and streamline their operations. By merging with Mobil, Exxon would become large enough that it may be able to convince the Saudis that it can manage a joint venture with Saudi Arabian oil officials rather than being part of a large syndicate. In addition, in the past, Mobil performed substantial work with the Saudi Oil Ministry and several of its executives have close ties with Saudi officials.
  • 10. 10 | P a g e New Company after Merger The value range for Mobil, as a standalone company is between $59 and $78 billion, as shown in the comparative company valuations above, and the combined company, Exxon Mobil, the value range is between $209 and $245 billion. ExxonMobil markets products around the world under the brands of Exxon, Mobil, and Esso. Mobil is ExxonMobil's primary retail gasoline brand in California, Florida, New York, New England, the Great Lakes and the Midwest. Exxon is the primary brand in the rest of the United States, with the highest concentration of retail outlets located in New Jersey, Pennsylvania, Texas and in the Mid-Atlantic and Southeastern states. Esso is ExxonMobil's primary gasoline brand worldwide except in Australia and New Zealand, where the Mobil brand is used exclusively. In Colombia, both the Esso and Mobil brands are used. The upstream division dominates the company's cashflow, accounting for approximately 70 percent of revenue. The company employs over 82,000 people worldwide, as indicated in ExxonMobil's 2006 Corporate Citizen Report, with approximately 4,000 employees in its Fairfax downstream headquarters and 27,000 people in its Houston upstream headquarters. ExxonMobil is organized functionally into a number of global operating divisions. These divisions are grouped into three categories for reference purposes, though the company also has several ancillary divisions, such as Coal & Minerals, which are stand alone. It also owns hundreds of smaller subsidiaries such as Imperial Oil Limited (69.6 percent ownership) in Canada, and SeaRiver Maritime, a petroleum shipping company. Key Merger Parameters Sr. No. Particulars Value Exxon Corp. Parameters before Merger 1 Revenue of Exxon(before merger) 132839 (million dollars) 2 OtherIncome of Exxon(before merger) 2303 (million dollars) 3 Earningsfromequityinterestsandother revenue 2100 (million dollars) 3 PBT of Exxon(before merger) 12,798 (million dollars) 4 PAT of Exxon(before merger) 8,460(million dollars) 5 ProductionCapacityof Exxon(before merger) 6.2 billion barrels of crude oil and 26.1 trillion cubic feet of natural gas as of the end of 1997 Mobil Corp. Parameters before Merger 6 Revenue of Mobil (before merger) 64327 (million dollars) 7 OtherIncome of Mobil (before merger) 1579 (milliondollars) 8 PBT of Mobil (before merger) 49,035 (milliondollars) 9 PAT of Mobil (before merger) 3,272 (milliondollars)
  • 11. 11 | P a g e 10 ProductionCapacityof Mobil (before merger) 928,000 barrels per day 11 Exchange Ratio 1.32015 12 Cash payment(if any) N/A 13 Newcompanyaftermerger Exxon Mobil References 1. ExxonFinancial Statementspre-merger- http://www.sec.gov/Archives/edgar/data/34088/0000930661-99-000626.txt 2. ExxonFinancial Statementspre-merger- http://www.secinfo.com/dSAKe.61Z3.htm 3. http://research.omicsgroup.org/index.php/ExxonMobil 4. Analysisof the ExxonMobil MergerbyBob Penn& Raphael SandaltzopoulosFebruary4,1999.