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Mergers, Acquisitions, and International Strategies: A Case Study of Exxon Mobil and Chevron Corporations

Mergers, Acquisitions, and International Strategies: A Case Study of Exxon Mobil and Chevron Corporations

 

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Mergers, Acquisitions, and International Strategies: A Case Study of Exxon Mobil and Chevron Corporations

Introduction

Even though the push for mergers and acquisitions existed long before the turn of the 20th century, it gained more momentum after the second war when technological innovations in the transport and telecommunication industries revolutionized the world. With the advent of fast and efficient means of communication, major business actors became able to spot and access numerous investment opportunities in distant markets. Gradually, the new technological advancements led to globalization. The latter is responsible for transforming national boundaries into an open global village. As a consequence, companies with origins in certain countries can successfully operate multiple commercial activities in several other countries situated thousands of miles from each other. For instance, the upsurge in the number of Multinational Corporations (MNCs) commencing in the 1980s is a clear indicator of the bountiful fortunes of globalization.

As numerous organizations embraced globalization, they had to cope with the enormous challenges that accompanied international operations. Up to date, global commercial endeavors have to deal with the challenges of diverse cultures as well as the intricacy of extraordinary situations that demand unique management and leadership responsibilities. Hence, as firms acquire new mergers and acquisitions, or as they move their services or subsidiaries to new territories, they must relentlessly be able to install unique organizational structures suitable to make their venture successful. In spite of the optimism that surrounds new enterprising projects, they are basically a gamble and a huge percentage of them fail to yield the expected results.

This paper specifically delves into the application of mergers, acquisitions, and international repositioning in global business.  Specifically, it studies the above stated tactics with an objective of establishing how each of them has been used by Exxon Mobil and Chevron Corporations to transform their entrepreneurial activities. After a thorough appraisal of the two companies, the paper will ascertain all the motives behind each decision and determine if each strategy has led to the expected outcomes. Moreover, the assessment will postulate probable perspectives that can be utilized by the companies to enable them improve their involvement in mergers, acquisitions, as well as international business.

 

Literature Review

International business as a perspective has gained huge prominence ever since the inception of globalization. There are many theoretical explanations that have been forged by various intellectuals to try to decode the application of this trade, including the comparative advantage theory by David Ricardo, and the eclectic theory by John Dunning (Grosse & Behrman, 1992). Basically, businesses enter into international trade so that they can position their investments where they have the best comparative advantage, or where they can yield the best returns (Kelly, 2009). However, before a company decides to start a new venture away from its home country, its managers must undertake a thorough strategic analysis to properly anticipate all the probable cost benefit issues. Some of the strategic processes that have in the past been exploited to achieve the goal of global presence are mergers and acquisitions.

Mergers and acquisitions are closely interrelated because the intentions of undertaking them are usually similar. Historically, their main drivers or objectives include: search for novel skills, need for diversification, international relocation, geographical consolidation, capacity reduction, market pressures, need for management efficiency, and the need to dominate a market via monopoly power (Roberts, Wallace, & Moles, 2003). Overall, they are both aimed at making larger companies that can be more competitive and profitable. According to Bohlin and Thomson (2000), the motivations behind mergers and acquisitions are: to make and utilize new synergies, to amplify market share, to outcompete or eliminate competitors, to procure new products or technologies, and to gain footings in new territories or countries.

In spite of the similarity seen in the motives giving rise to mergers and acquisitions, the manner in that they are executed is quite dissimilar. Whereas the former is a negotiated fusion of two or more business entities to form one new big entity (Foltz, Alaci, & Kargin, 2002), the latter is the complete purchase of assets belonging to one company by another (Ransariya, 2010). Before deciding which amongst the two options to exploit, a company must establish its interests as well its abilities. Most importantly, it is vital to study the external market forces to determine the best viable alternative based on the available opportunities.

Discussion

The Exxon Mobil Merger

            The Exxon Mobil merger of November 30, 1999 is a standout case because it is one of the most successful mergers in the oil and gas industry. The main motivation behind this particular merger was the nature of the oil and gas industry (Weston, 2002). For many years, the petroleum sector has been one of the most competitive industries in the world; representing over 20 percent of world trade volume. Therefore, small companies have a difficulty of surviving in this industry because it requires a huge capital base to undertake profitable explorations and exportation of petroleum products. Moreover, the entire sector is dominated by cartels, with the Organization of the Petroleum Exporting Countries (OPEC) controlling over 60 percent of the industry. Unlike private actors who mainly depend on costly exploration and production contracts, OPEC members rely on their immense deposits to produce cheap oil products. Consequently, members to the latter organization have a comparative advantage in cheap production over the private entities. Hence, the two companies merged so that they could make a bigger and stronger company that could invest in expensive, but highly risky ventures expected to yield high returns.

The need to improve performance through regional and technological integration was the other major motivation behind this union. Both Exxon and Mobil had a moderate worldwide reach, and their merger meant that they would have operations running in parts of West Africa, Asia, Russia, South America, as well as in Canada. Their technological experiences also complemented each other, whereby Exxon Corporation had deep-sea exploration technology, while Mobil had on-land technology. As a result, even before the official declaration of the merger, the two companies correctly anticipated that they would have an expansive global reach, as well as hyper-technologies to exploit the various geographical opportunities that would present themselves.

Anticipation for lower operational cost was the other major motivating factor behind the Exxon Mobil merger. Foremost, the companies predicted that they would eliminate duplicate facilities in places where they both had a presence. Secondly, they postulated that they would concentrate in places that had a huge production potential by making use of each other’s best business strategies and technologies. Thirdly, their administrative costs would reduce substantially since the emergent company would amalgamate their old administrative offices.

Viability and Justification of the Exxon Mobil Merger: For many years, business organizations have developed a strong and an incessant attraction for mergers, acquisitions, and other lucrative international ventures. The concoction of globalization and the general technological boom that commenced in the last quarter of the 20th century have combined to give rise to an infinite number of multi-sectoral benefits in the world. In the oil sector, firms are in a rush to capitalize on every available opportunity. Pragmatic studies have already shown that these two factors have catalyzed an explosion of competition to control both domestic and international markets. For this reason, some businesses have been forced to transform their initial structures to suit the changing marketplace needs. Three major strategies that have dominated these restructuring processes are: entry to mergers, acquisitions, and international repositioning.

The decision by Exxon and Mobil to unite under a merger was the best choice under their predicament. Since both companies had already established a worldwide reach, the most applicable choice was to search for a strategy that would improve management efficiency and increase geographical reach. Before the merger, the solitary companies lacked the capacity to venture into new territories or activities that would boost their growth. However, the merger led to the formation of the world’s biggest petroleum company with numerous resources at its disposal. As of 1998, both companies were well established U.S. companies in the energy industry. Hence, a combination of their technologies, infrastructure, and resources would undoubtedly increase their strength to initiate bigger projects.

The Chevron Texaco Acquisition

            This acquisition was made public on October 15, 2000 after Chevron Corporation spent $36 billion to acquire Texaco (Marfo, Amoako, & Gyau, 2013). Together, the two companies formed U.S’s second biggest oil company, only second to the Exxon Mobil Corporation. Chevron Texaco also became the fifth largest publicly traded oil company in the world. The principle factors that drove Chevron to undertake the acquisition included: the need to improve performance, the desire for geographical expansion, and the urge diversify the firms operations. With regard to improving performance, Chevron wanted to reduce operational costs by attaining a mix of new skills and technologies. In addition, it wanted the new financial strength to boost its global reach by financing breakthroughs in explorations.

 

Unprecedentedly, announcement of the merger led to mixed results. Contrary to the expectations of the acquiring shareholders, their stock share price fell by over 2.5 percent as a result of the declaration. They had anticipated that the new deal would boost their stock prices and give them financial strength. That was the reason why they coined the term ChevronTexaco to make the venture seem like a merger even though it was actually an acquisition.  After a year, statistics from the new firm indicated that its affiliates performed worse compared to the way they performed independently a year before the merger (Marfo, Amoako, & Gyau, 2013). Finally, ChevronTexaco dropped the latter name to repossess its original title: the Chevron Corporation. However, Texaco remained as a subsidiary within the organization.

Viability and Justification of ChevronTexaco: The Decision by Chevron Corporation to acquire was wrong. Unlike mergers which generally tend to raise the stock share price of the merged firms, acquisitions tend to reduce the share price of the acquiring firm. Furthermore, the share prices of acquired firms under this arrangement tend to rise. Similarly, the post acquisition share price of the original Chevron Corporation shareholders fell substantially by an average of 2.7 percent. The fall is an indication that the move was not the right choice for the company.

Elucidation: Possibly, Chevron should have used a horizontal merger approach that would have seen it merge with an equal player in the oil market. Mergers can involve over three companies, and I see no harm in Chevron seeking a merger with Exxon Mobil Corporation. The success of the latter venture shows that mergers are more viable than acquisitions, especially where they involve firms with a similar background. Since Chevron Corporation operates in the same oil industry as Exxon Mobil, they can combine their resources to form one big monopoly that can rival OPEC.

 

References

Bohlin, N., Daley, E., & Thomson, S. (2000). Successful post-merger integration: realizing the synergies. Handbook of Business Strategy1(1), 225-231.

Foltz, J. C., Araci, H., & Kargin, M. (2002). Mergers, acguisitions, joint ventures, and consolidations in agribusiness: An example of an acquisition (Acquisition of continental grain by Cargill). Yönetim ve Ekonomi: Celal Bayar Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 9(1), 135-156.

Grosse, R., & Behrman, J. N. (1992). Theory in international business.Transnational corporations1(1), 93-126.

Kelly, P. (2009). International business and management. Cengage Learning.

Marfo, E. O., Amoako, K. O., & Gyau, E. K. (2013). Mergers and acquisitions: The performance of the acquiring firm-empirical study of Cheverontexaco. Canadian Social Science9(5), 176-187.

Roberts, A., Wallace, W., & Moles, P. (2003). Mergers and acquisitions. Pearson Education.

Ransariya, S. N. (2010). Financial growth indicator of merger and acquisition in Indian corporate sector (Doctoral dissertation, Saurashtra University).

Weston, J. F. (2002). The exxon-mobil merger: An archetype. Journal of applied finance12(1), 69-88.

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