Exxon Mobil Corporation was formed in 1999 by the merger of two major oil companies, Exxon and Mobil. Both Exxon and Mobil were descendants of the John D. Rockefeller corporation, Standard Oil which was established in 1870. The reputation of Standard Oil in the public eye suffered badly after publication of Ida M. Tarbell's classic exposé The History of the Standard Oil Company in 1904, leading to a growing outcry for the government to take action against the company.By 1911, with public outcry at a climax, the Supreme Court of the United States ruled that Standard Oil must be dissolved and split into 34 companies. Two of these companies were Jersey Standard ("Standard Oil Company of New Jersey"), which eventually became Exxon, and Socony ("Standard Oil Company of New York"), which eventually became Mobil.Sherman Antitrust law: Accused the co of monopolization
Crude prices were dipping, margins were shrinking. The industry was in a consolidation phase. Merger of BP- AMCO and Shell-Texaco
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 had been partly offset by one-time costs at $2 billion for business integration. The firms also planned to eliminate about 9,000 jobs. A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion.
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: deepwater 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% while raising capital productivity.
Under the merger agreement, an Exxon subsidiary would merge into Mobil so that Mobil becomes a wholly owned subsidiary of Exxon Mobil. As a result, Exxon would hold 100% 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.Exxon Mobil deal structure5 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 its shares for Mobil or $74.1 billion. This was a $15.4 billion (26.2%) premium over Mobil’s market value or $94.9 a share. After the price run-up Exxon shareholders would own approximately 70% of the combined Exxon Mobil entity, while Mobil shareholders would own approximately 30%. 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%) of Mobil common stock at a strike price of $95.96. 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”.
Exxon had better return on assets (6.75%) and return on equity (14.57%) ratios (Mobil’s were 3.95% and 9.01% 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% vs. 38.52%), but Exxon had higher gross operating margin (7.9%) and profit margin (5.4%) ratios than Mobil (6.56% and 3.18% 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.Liquidity ratios definitely show that both companies were financially stable, but Exxon was in a better situation than Mobil. The Exxon’s current andquick 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 % 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 because of 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.
J.P. Morgan performed traditional P/E analysis. Such analysis indicated that Mobil had been trading at an 8% to 15% discount to Exxon. J.P. Morgan's analysis indicated that if Mobil were to be valued at price to earnings 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 Company plc,Chevron Corporation,Exxon,Royal Dutch Petroleum Company,Shell Transport & Trading Co. plc,Texaco Inc.P/E multiple for these firms ranged 19.3–23.8. The analysis showed that Mobil was undervalued 5–16% relative to comparables with fair price $79–89 a share. It’s needed to notice that comparables analysis couldn’t capture the synergy effect, value creation and differences. Simple DCF analysis of Mobil as a standalone company gives range of intrinsic value 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.Summary of Exxon Mobil merger valuationSince 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 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% to 25% matched market precedent. In comparison, BP paid 35% 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 value or $17.2 billion of additional value created. This figure would be even higher if we consider pre-announcement pro forma combined market value of $233.7 billion. In this case created value reaches $45.1 billion.
Mergers and acquisitions
Lee Raymond, CEO of Exxon will continue as the CEO of Exxon Mobil and Lou Noto, CEO ofMobil will be the Vice President of the merged entity
Historical Background Decedents of Standard Oil 1911 – Standard oil dissolved and split into 34 companies Jersey Standard – Exxon Socony – Mobil
Led by Walter C. Teagle Largest oil producer in the world Was marketed with the names Esso, Enco & Humble Changed its name to Exxon in 1972
Led by Henry Clay Folger 1931 – Socony-Vacuum 1933 – Socony Vacuum and Jersey Standard mergedtheir interests in Far Eastinto a 50-50 joint venture 1963 – changed name to ‘Mobil’
Rationale/Synergies A reflection of industry forces Three Categories Near Term Operating Synergies Capital Productivity Improvements Technology Synergies
Near Term OperatingSynergies Per tax benefits of $3.8 billion Operating Synergies: Increase in production Sales and Efficiency Decreases in unit costs Combining complementary operations
Capital ProductivityImprovements Efficiencies of scale Cost savings Sharing of best management practices Business and Assets were highly complementary
Technological Synergies Owned proprietary technologies in the field of: Deep water and arctic operations Heavy oils, gas-to-liquids processing LNG High Strength Steel Refining and Chemical Catalyst
Regulatory Issues 4-0 Vote in favour by Federal Trade Commission Concerns over areas where these firm directly competed Extensive Restructuring: Sell 2431 gas stations primarily in northeastern US, California, Texas Exxon to scrap options to buy Gasoline stations, divest its refinery and its jet turbine oil business and stop selling diesel fuel and gasoline in California under the Exxon name for at least 12 years Mobil to shed its fee and leased service stations from NY to Virginia, divestiture of joint venture with BP Amco
The Merger Pooling of Interest Method Under the merger agreement, an Exxon subsidiary would merge into Mobil so that Mobil becomes a wholly owned subsidiary of Exxon Mobil In the combined entity, Exxon shareholders would hold 70% and Mobil shareholders 30% Holders of Mobil common stock would receive 1.32015 shares of Exxon common stock for each share of Mobil common stock
Since Exxons market capitalization was significantly larger than Mobils, Exxons shareholders would have enjoyed a greater proportion of the value creation if no premium were paid by Exxon in the merger. By offering a premium to Mobils 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. Morgans analysis showed that for transactions involving smaller companies with a relative market capitalization comparable to that of Mobil pre-announcement, a premium of 15% to 25% matched market precedent. In comparison, BP paid 35% premium for Amoco.
Market Reaction Positively assessed the merger as economically sound and value creating 20 day Cumulative Abnormal Returns – Exxon – 1.07%, Mobil – 14%
Sources of Information http://ec.europa.eu/competition/mergers/cas es/decisions/m1383_en.pdf "Exxon Mobil Joint Proxy statement in S-4 SEC Filing (Apr 5, 1999)“ "FTC File No. 9910077, November 30, 1998“ Crow, P (October 1999). "Exxon-Mobil merger wins approval in EU". Oil & Gas Journal 97 (43): 24.