Every organization experiences stress and difficulty
in coping with change. Lack of innovation from
within is widely recognized as one of the critical
problems facing businesses today in the United
States and Canada. To be successful, organizations
must embrace many types of change.
Organizational change is highly
important and history is replete with examples
of companies that change successfully, and are
profitable and admired. Some examples are General
Electric, Hewlett Packard and Motorola (Daft,
1997; Wall & Wall, 1995).
Strategic change is one of the
types of organizational change and is different
from others in its outlook, goals and method of
initiation and implementation. Franchising, mergers
and acquisitions, partnerships and joint venture
alliances are some examples of strategic changes.
In this paper, we begin by defining strategic
change and its differences from other types of
changes that may take place within an organization.
We delve deeper into the process of strategic
change and how companies go about it. Planning
and analysis are key components of strategic change,
so we specifically look at Porter’s five
force model and a study of the various environments
that must be analyzed to successfully plan and
implement change (Bovee, Thill, Wood & Dovel,
2000; Hax & Majluf, 1996; Porter, 1996).
After that, we look at ExxonMobil’s
merger of 1999 as a classic example of a strategic
change. We justify why it is a strategic change
and not any other type. We also specify what the
key motivation for this merger was by presenting
a brief background of other merger and acquisition
activity in the oil industry during that time
period. The success of this merger is the last
subject, after which we conclude the paper.
Strategic Change:
Organizational change is defined
as the adoption of a new idea or behavior by an
organization. In today’s highly complex
world, organizations need to continuously adapt
to new situations if they are to survive and prosper.
The current trend is toward development of the
learning organization, which engages everyone
in problem solving and continuous improvement
based on the lessons of experience.
The interacting systems which make
up the learning organization resemble a web in
which each element responds to and influences
every other element. Leadership provides vision
for development of strategies and serves as a
crucial support function for empowerment of employees,
the determination of organizational design, and
the extent of openness in information sharing.
Empowerment liberates employees but also places
upon them the added responsibilities of working
collaboratively, accepting greater leadership
roles and participating in strategy to benefit
the entire organization. Defining culture demands
the rethinking of roles, processes and values,
breaking down barriers that have separated departments
so that everyone shares information and works
together.
Information sharing requires adjustments
on the parts of managers for the inclusion of
employees, suppliers and customers, often necessitating
cultural and structural changes. Strategy is likewise
linked to structure and culture as the organization
changes its fundamental way of doing business
and allows strategies initiatives to flow bottom
up as well as top down (Glueck, 1980; Thompson
& Strickland, 1996; David, 1995).
A strategic change is only one
of the many types of organizational changes, the
most prominent of which are technology changes,
new-product changes and culture/people changes.
These are different from each other but changes
in one part may affect other parts of an organization:
a new product may require changes in technology,
and a new technology may require new people skills
and new structure (Davidson, 1995).
A Strategic change, however, is
a planned change which is related to the long-term
goals and objectives of an enterprise, and the
adoption of courses of action and the allocation
of courses of action, and the allocation of resources
necessary for carrying out these goals (Quinn,
1980).
It is different from other types
of changes in many ways. A technology change is
different because that is related to the organization’s
production process – how the organization
does its work. They are designed to make the production
of a product or service more efficient. The technology
change is bottom-up. A brief digression over here
is necessary to fully understand the difference
between bottom-up and top-down change (Quinn,
1980; Steiner, 1979).
Generally, a company can take two
main approaches to change: top-down change or
bottom-up change. With top-down change, a strong
CEO or a top management team analyzes how to alter
strategy and structure, recommends a course of
action and then moves quickly to implement change
in the organization. The emphasis is on speed
of response and management of problems as they
occur. Bottom-up change is much more gradual.
Top management consults with managers at all levels
in the organization. Then, over time, it develops
a detailed plan for change, with a timetable of
events and stages that the company will go through.
The emphasis in bottom-up change is on participation
and on keeping people informed about the situation,
so that uncertainty is minimized (Quinn, 1980;
Hax, 1988).
Hence, a technology change is bottom-up
meaning ideas are initiated at lower organization
levels and then channeled upward for approval.
Another organizational change which is different
from strategic change is a new-product change
which is a change in the organization’s
product or service output. This is neither bottom-up
or top-down, rather, it requires expertise and
cooperation among many departments simultaneously,
and follows the horizontal linkage model. Strategic
changes are different from these other changes
because firstly, they are very long-term in nature
and require rational planning to be an essential
component of the process. Secondly, they are mostly
top-down where the initiation of the idea occurs
at the upper level and is then implemented downward
(Daft, 1997; D’Aveni, 1994; Drucker, 1995).
The process of strategic change
is initiated when managers sense a need for change
due to a performance gap – a disparity between
existing and desired performance levels. The performance
gap may occur because current performances are
not up to standard or because a new idea or structure
could improve current performance (Hill &
Jones, 1995).
After the need for change has been
perceived, the next part of the change process
is initiating change, a truly critical aspect
of change management. In this part, it is integral
to conduct a detailed analysis of the internal
and external environment which the organization
is a part of. There exist a lot of tools which
are used for such an analysis, the Porter’s
five force model is a prominent one (Hill &
Jones, 1995; Mintzberg, 1994).
Michael E. Porter of the Harvard
School of Business Administration developed a
framework which helps managers with the task of
analyzing the competitive forces in an industry
in order to identify the opportunities and threats
confronting a company. this model forces on five
forces that shape competition within an industry:
(1) the risk of new entry by potential competitors,
(2) the degree of rivalry among established companies
within an industry, (3) the bargaining power of
buyers, (4) the bargaining power of suppliers
and (5) the closeness of substitutes to an industry’s
products (Hill & Jones, 1995).
Porter argues that the stronger
each of these forces, the more limited the ability
of established companies to raise price and earn
greater profits. Within Porter’s framework,
a strong competitive force can be regarded as
a threat since it depresses profits. A weak competitive
force can be viewed as an opportunity, for it
allows a company to earn greater profits. Because
of factors beyond a company’s direct control,
such as industry evolution, the strength of the
five forces may change over time. In such circumstances,
the task of strategic managers is to recognize
opportunities and threats and formulate appropriate
strategic responses. In addition, it is possible
for a company, through its choice of strategy,
to alter the strength of one or more of the five
forces to its advantage. Hence, Porter’s
model of five competitive forces is a very useful
tool for strategic managers and is very useful
when analyzing a situation which might demand
change (Hill & Jones, 1995; Breslow, 1998;
Byrne, 1996).
Another tool for analyzing the
situation and the need for change is when strategic
managers consider the following factors:
The Legal-Political Environment:
Businesses must
deal with unfamiliar political systems when they
go international, as well as with more government
supervision and regulation. Some of the major
legal-political concerns affecting international
businesses are political risk, political instability
and laws and regulations.
A company’s political risk
is defined as its risk of loss of assets, earning
power, or managerial control due to politically
based events or actions by host governments. Political
risk includes government takeovers of property
and acts of violence directed against a firm’s
properties or employees.
Another frequently cited problem for international
companies is political instability, which includes
riots, revolutions, civil disorders and frequent
changes of government. Political instability increases
uncertainty. And although most companies would
prefer to do business in stable countries, some
of the greatest growth opportunities lie in areas
characterized by instability (Adamson & Marks,
2001).
Government laws and regulations
differ from country to country and make manufacturing
and sales a true challenge for international firms.
Host governments have myriad laws concerning libel
statutes, consumer protection, information and
labeling, employment and safety, and wages. International
companies must learn these rules and regulations
and abide by them. The most visible changes in
legal-political factors grow out of international
trade agreements and the emerging international
trade alliance system. For example, the impact
of the General Agreement on Tariffs and Trade
(GATT), the European Union (EU), and the North
American Free Trade Agreement (NAFTA) was enormous
for strategic planners and managers as it changed
the very environment the business operated in
(Daft, 1997).
The Economic Environment:
The economic environment represents
the economic conditions in the country where the
organization operates. This part of the environment
includes such factors as economic development,
infrastructure, resource and product markets,
exchange rates; and inflation, interest rates
and economic growth.
Economic development differs widely
among countries and regions of the world. Countries
can be categorized as either developing or developed
and the criterion used to classify countries as
such is per-capita income. Infrastructure also
needs to be considered which is the physical facilities
of a country which support economic activities.
This includes transportation facilities such as
airports, highways, and railroads; energy-producing
facilities such as utilities and power plants;
and communication facilities such as telephone
lines and radio stations. Resource and product
markets are also important. Aside from that, exchange
rates also deeply impact a company’s strategic
plans and count for a lot during any situation
analysis for change plans.
The socio-cultural environment
also plays an important role and must be analyzed.
Social values include power distance, uncertainty
avoidance, individualism and collectivism and
masculinity/femininity. Social values influence
organizational functioning and management styles.
All the above factors have to be
considered and a thorough analysis has to be conducted
for a strategic change to be successful. Through
the above analysis, once the problem and internal/external
situation has been identified, management must
determine the ideal future state of the company,
that is, how it should change the strategy and
structure. Them, the obstacles to change must
be determines. Strategic managers must analyze
the factors that are causing organizational inertia
and preventing the company from reaching its ideal
future state. Obstacles to change can be found
at four levels in the organization: corporate,
divisional, functional and individual (Robert,
1993).
Implementing change raises several
questions: for instance, who should actually carry
out the change: internal managers or external
consultants? These and other concerns have to
be satisfied to introduce and manage change. The
last step in the strategic change process is to
evaluate the effects of the changes in strategy
and structure on organizational performance. A
company must compare the way it operates after
implementing change with the way it operated before.
Managers use indices such as stock market price
or market share to assess the effects of change
in strategy (Hrebiniak & Joyce, 1984).
ExxonMobil and Strategic
Change:
Mobil Chemical Company was established
in 1960 and by 1999, it was a strong name in the
industry. Its principal products included basic
olefins and aromatics, ethylene glycol and polyethylene.
The company produced synthetic lube base stocks
as well as lube additives, propylene packaging
films and catalysts. It enjoyed the benefits of
having manufacturing facilities in 10 countries
(Holmstrom & Kaplan, 2001).
Exxon Chemical Company became a
worldwide organization in 1965 and in 1999 was
a major producer and marketer of olefins, aromatics,
polyethylene and polypropylene. Its expertise
did not stop here as it also had specialty lines
such as elastomers, plasticizers, solvents, process
fluids, oxo alcohols and adhesive resins. It had
the reputation for excelling in metallocene catalyst
technology to make unique polymers with improved
performance. Its manufacturing facilities were
located in 24 countries.
Exxon and Mobil Corporation merged
to combine there operations in 1999, to emerge
as ExxonMobil Corporation. The top management
hoped to combine their businesses into the largest
U.S.-based company of any type and the largest
non-government oil company in the world. The merged
company expects that the scale of the worldwide
near-term cost savings and the long-term strategic
benefits will most probably exceed those announced
in previous years. Also, the merger will allow
ExxonMobil to compete more effectively with the
recently combined multinational oil companies
and the large state-owned oil companies that are
rapidly expanding outside their home areas.
This was a strategic change because
the company had its business strategy at the root
of the change – it wanted to enter new markets
and expand the size of its operations. These are
the very basic characteristics of a strategic
change. The management had conducted a thorough
analysis of the competitive forces in the industry.
In fact, sources at Exxon and Mobil said that
changes in the oil industry and the need to reduce
costs in the face of low prices were two important
factors in the merger. In addition to the growth
of state-owned oil companies, the changes include
the emergence of low-cost independent refiners
and marketers in U.S. markets (Cibin & Grant,
1996; Davies, 2000).
Mobil Corp. Chairman Lucio A. Noto
said that Mobil had already reduced its costs
by $4 billion but if a merger did not take place,
future savings would be very hard to achieve.
He said, “now we're getting down to muscle
and not fat.” Strategic changes are also
classified as ways of reducing costs. Mergers
generally are effective ways of doing that because
the new resources which companies share often
cuts costs significantly (Davies, 2000).
The merger makes ExxonMobil the
undisputed leader in each of its world-class businesses
and strengthens its proprietary technology leadership.
Together, both conduct business in about 200 countries
and have over 200 years of experience. There is
no question they have established a new definition
for ‘efficiency’ and ‘world-class
scale’ (Davies, 2000; Mergers and Acquisitions).
The expansion of business operations
– another trademark of strategic change
– was also present in this example as with
the merger, ExxonMobil acquired a broader portfolio
of opportunities in attractive upstream areas
and high-growth markets and businesses worldwide.
It became able to optimize its choices to further
improve returns. Each of its businesses began
executing their plans to capture these opportunities
(MERGERS Why most big deals don’t pay off).
Strategic change is also marked
by exhaustive long-term projections. ExxonMobil
had a very extensive inventory of upstream development
projects even before the merger but based on the
development plans put forward with the merger,
liquids and natural gas production was expected
to grow by about three percent per year through
2005. new geographical markets were also expected
to be covered and key growth areas included the
deepwater Gulf of Mexico, offshore eastern Canada,
West Africa, the Caspian, South America and the
Middle East. Beyond 2005, growth is expected to
increase based on the numerous development projects
currently in the design and planning stages (U.S.
Energy Information Administration).
As for the downstream, the strategy
was to improve returns through self-help initiatives
and profitable growth. Focused marketing programs
and customer-focused strategies were to be implemented
for ExxonMobil Corporation to make it truly the
leader in its industry.
This was a strategic change also
because both companies were distinguished in their
own right and both joined hands to become a strong
force in this highly comeptitve industry. Technology
had always been a long-standing core strength
of both companies and differentiated them from
competition. It was unanticipated but a much appreciated
result of the merger when it was discovered that
the technology programs of the two companies were
far more complementary than had been assumed.
Consequently, cross application benefits exceeding
$1 billion were projected for the five years after
1999 (U.S. Energy Information Administration).
The fact that ExxonMobil's strong
first half earnings generated significant cash
flow, with a first-half cash surplus of more than
$8 billion made it clear that the company had
definitely performed a thorough analysis of its
external environment and then ventured in to this
alliance. This surplus allowed ExxonMobil's net
debt to be reduced to the same level as Exxon's
pre-merger and resulted in a net debt to capital
ratio of just over 10 percent. This put the company
in a very strong financial position with significant
flexibility (U.S. Energy Information Administration).
All strategic decisions were taken
prior to the merger and all possible pitfalls
considered. The capital spending program for 2000
was forecast to be between $11 and $12 billion
and this reflected the completion of several major
upstream and chemical projects, lower lease bonus
payments this year and selectivity/efficiency
benefits in areas like exploration (U.S. Energy
Information Administration).
The change was also a top-down
one, which is highly characteristic of strategic
changes. According to Exxon Corporation Chairman
Lee R. Raymond, “In putting together the
merger, we have not lost sight of what has and
will continue to differentiate ExxonMobil from
competition. Our model calls for ExxonMobil to
have a leadership position in all core businesses
and technology. It demands flawless execution
in our base operations and rigorous discipline
in selecting and implementing projects. By combining
these priorities with an efficient corporate and
financial structure, we expect to continue to
produce superior business results and strong returns
to our shareholder” (Holmstrom & Kaplan,
2001; Pare, 1994)
Another model of corporate strategy
which can be applied to the ExxonMobil merger
is the BCG matrix. It organizes businesses along
two dimensions – business growth rate and
market share. Business growth rate pertains to
how rapidly the entire industry is increasing.
Market share defines whether a business has a
larger or smaller share than competitors. The
combinations of high and low market share and
high and low business growth, provide four categories
for a corporate portfolio: star, question mark,
cash cow and dog. The ExxonMobil merger was a
way for both companies to add a Star business
unit to their portfolio, which is visible, attractive
and will generate profits and positive cash flows
even as the industry matures and market growth
slows (Porter, 1980; Porter 1985).
Key motivation and drivers of ExxonMobil
merger:
The high level of merger activities throughout
the world between 1994 and 2000 reflected major
change forces. These shocks included technological
changes, globalization of markets, intensification
of the forms and sources of competition leading
to deregulation in major industries, and the changing
dynamics of financial markets.
Mergers and restructuring in the oil industry
reflected these broader forces as well as its
own characteristics.
The oil industry is large in size and in challenges.
In recent decades, most new major reserves have
been discovered outside the United States. Potentials
for future reserve additions are in countries
with considerable business and political risks.
The prices of crude oil and oil products have
historically been subject to wide fluctuations.
The relative advantages of operations integrated
over exploration, production, refining, and marketing
have changed. Intermediate markets have developed
along the value chain. Spot, forward and futures
markets have become more active and more popular
as means of hedge trading. The reduced costs of
information have resulted in lowered transaction
costs. Barriers to entry have fallen and new specialist
firms have emerged in most segments of the value
chain (Davies, 2000; Jacoby, 1974).
The ownership of oil and oil reserves has long
been a powerful force in the economic, political,
and military relationships among nations (Jacoby,
1974; Yergin, 1993). Repeated oil price shocks
have caused the oil industry to engage in a wide
range of adjustment responses. Substantial merger
activity took place between 1980 and 1985 (Ruback,
1983).
Diversification efforts into unrelated activities
were unsuccessful. Restructuring efforts sought
to lower operating costs.
It was during 1998 and until 2001 that major horizontal
mergers took place. The BPAmoco merger (announced
on 8/11/98) projected $2 billion in savings, stimulating
other oil companies to seek improvements in operations.
The Exxon-Mobil combination was announced on 12/1/98.
In December 1998, the French oil firm Total (founded
in 1924 as Compagnie Française des Pétroles)
announced the acquisition of PetroFina, a large
Belgian oil company. On 7/5/99, the new TotalFina
began a $43 billion hostile bid for the former
state-owned Elf Aquitaine; the deal was completed
at a price of $48.8 billion and became the fourth
largest world oil company. On 4/1/99, an agreement
was reached for BP Amoco to acquire Arco following
negotiations initiated by Arco’s management.
The U.S.
Federal Trade Commission (FTC) required that
Arco sell its Cushing, Oklahoma operations and
its Alaskan crude-oil assets (Phillips Petroleum
became the buyer). After rejecting a merger proposal
from Chevron in June 1999, Texaco agreed to a
takeover announced 10/16/00. In October 1998,
DuPont did an equity carve-out of 30% of Conoco;
the remaining 70% was spun-off to shareholders
in August 1999. On 5/29/01, Conoco purchased Gulf
Canada Resources. Phillips Petroleum acquired
Tosco, the largest U.S. independent refiner, on
2/4/01. On 11/18/01, Phillips and Conoco agreed
on a “merger of equals”; ConocoPhillips
would become the world’s sixth-largest oil
and gas company based on reserves (Mitchell &
Mulherin, 1996; Rock, 1988).
The M&A activity of the oil industry can
be viewed as a response to price instability.
Oil firms sought to invest in new technologies
to reduce costs. Previous restructuring efforts
and improvements in technologies had lowered costs
to $16 to $18 per barrel. Oil prices declined
to $9 per barrel in late 1998. Thus, the overriding
objective for the mergers beginning in 1998 was
to further increase efficiencies to lower breakeven
levels toward the $11 to $12 per barrel range
(Roeber, 1994; Mitchell & Mulherin, 1996;
Holmstrom, & Kaplan, 2001; Ruback, 1992).
The motivations for the Exxon-Mobil merger,
completed on 11/30/99, reflect the industry forces
described above. By combining complementary assets,
Exxon-Mobil would have a stronger presence in
the regions of the world with the highest potential
for future oil and gas discoveries. The combined
company would also be in a stronger position to
invest in programs involving large outlays with
high prospective risks and returns.
Exxon’s experience in deepwater exploration
in West Africa would combine with Mobil’s
production and exploration acreage in Nigeria
and Equatorial Guinea. In the
Caspian region, Exxon’s strong presence
in Azerbaijan would combine with Mobil’s
similar position in Kazakhstan, including its
significant interest in the Tengiz field, and
its presence in Turkmenistan. Complementary exploration
and production operations also existed in South
America, Russia, and Eastern Canada (ExxonMobil
Corporation).
Near term operating synergies of $2.8 billion
were predicted. Two-thirds of the benefits would
come from eliminating 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 (Holmstrom, & Kaplan, 2001).
Exxon justified its purchase of Mobil in part
by claiming some $2.8 billion in projected savings.
Yet studies of mergers have shown that such projections
often turn out to be mirages. The hoped-for economies
of scale that bigness brings may not be able to
compensate for the hidden costs of running an
expanded conglomerate. In the end, the only real
rationale for a merger is heightened efficiency,
productivity and profitability. All else is secondary.
Success of ExxonMobil merger:
Three major types of merger motivations were
identified by Berkovitch and Narayanan (1993):
synergy, hubris, and agency problems. In the Exxon-Mobil
merger, synergy and efficiency objectives were
promised and achieved. The initial synergies were
estimated at $2.8 billion. As a result of rapid
and effective integration of the two companies,
Chairman Lee Raymond announced within seven months
of the completion of the merger that synergies
of $4.6 billion had been achieved. Analysts’
reports were projecting a further increase in
synergies to the $7 billion level.
Synergies can result from cost reductions or
revenue increases. ExxonMobil benefited from sales
of duplicate facilities and employment reductions.
Costs were reduced by adoptions of best practices
from both companies, particularly in combining
advanced technologies. Revenue increases can come
from strengthening the market positions of each.
In addition, joint ventures with major producing
countries such as Saudi Arabia were facilitated
by strengthening Exxon’s position as one
of the three largest international oil companies
(Holmstrom, & Kaplan, 2001).
Hubris may be reflected in overpaying for the
target. Exxon paid a premium of $15.5 billion.
The equity market cap of the combined firm increased
from $234 billion to actual values of $280 billion
by the end of 1999 and to $301 billion by the
end of 2000. Thus the capitalized value of the
synergies was $46 to $67 billion. In his news
release of 8/1/00, Chairman Raymond stated that
an improvement of at least 3 points above the
historic Exxon level of return on capital employed
(ROCE) was being achieved. These results are inconsistent
with agency problems (Holmstrom, & Kaplan,
2001).
Other motives for mergers discussed in the literature
include tax savings, monopoly, and redistribution.
Tax aspects were not a major factor. Regulatory
agencies found no antitrust problems in the upstream
activities (exploration and development). However,
divestitures were required in downstream activities
(distribution and marketing) (Yergin, 1993).
Redistribution from bondholders did not occur.
Redistribution from labor took place in the sense
that employment reshuffling and reductions were
made. In their review of merger activity, Holmstrom
and Kaplan (2001) described the positive influence
of a number of developments in the 1990s.
These included an increase in equity-based compensation,
an increased emphasis on shareholder value, a
rise of shareholder activism, improved and more
active boards of directors, increased CEO turnover,
and an increased role of capital markets. The
efforts for efficiency improvements sought in
the Exxon-Mobil merger reflected these general
developments. In their companion review, Andrade,
Mitchell, and Stafford (2001) further developed
the earlier Mitchell and Mulherin (1996) emphasis
on the role of shocks in causing mergers. Their
analysis is applicable to the oil industry mergers.
But the pressures have been more than periodic
shocks.
Price instability has been a continuing problem
for oil firms. Large price changes in both downward
and upward directions have been destabilizing.
Price drops reduce profit margins and investment
returns. Price rises increase margins and returns,
but stimulate production expansion and new entrants.
Hence, price uncertainty created strong continuing
pressures for improved efficiency to reduce oil
finding and production costs.
Another oil industry characteristic is high
sensitivity to changes in overall economic activity.
The East Asian financial problems in 1997-98 reduced
demand resulting in a decline in world oil prices
to below $10 per barrel in late 1998. The decline
in growth in the U.S. economy beginning in 2000
contributed to the drop in oil prices from $37
to under $20 per barrel during 2001 (Andrade,
Mitchell, and Stafford, 2001).
The rise of 15 government-connected national
oil companies created increased competitive pressures.
The increased application of technological advances
in exploration, production, refining methods,
and transportation logistics created new competitive
opportunities and threats. Price instabilities
(like persistent overcapacity in the steel, auto,
and chemical industries) cause continuing pressures
for M&A activities to reduce costs and increase
revenues. In addition, the $2 billion synergy
in the BP acquisition of Amoco stimulated competitive
responses resulting in other mergers, alliances,
and joint ventures. The oil industry M&A activities
during 1998-2001 are consistent with the industry
shocks theory, an industry structural problems
theory, and a theory of competitive responses
(Andrade, Mitchell, and Stafford, 2001).
Mergers often fail because (1) companies experience
difficulties when trying to integrate divergent
corporate cultures, (2) companies overestimate
the potential economic benefits from an acquisition,
(3) acquisitions tend to be very expensive and
(4) companies often do not adequately screen their
acquisition targets. In the case of ExxonMobil,
none of these factors proved to be a problem.
These companies knew exactly how they would benefit
from each other’s technologies and resources
and did not go into the merger with high expectations
but little fact. The merger was expensive and
took a long time to gain approval from the authority
due to its large size and cost but so far, the
cost has been in large part justified. Divergent
corporate cultures never seemed to be an issue
and both companies spent a long time to size the
environment, themselves and the other company
before succumbing to the necessity of this merger
(Andrade, Mitchell, and Stafford, 2001).
The Exxon-Mobil combination is an archetype
of a successful merger. Fundamentally, the reasons,
structures, and implementation of the transaction
reflected the characteristics of the oil and gas
industry. The industry increasingly utilizes advanced
technology in exploration, production, refining,
and in the logistics of its operations. It is
international in scope. World demand is sensitive
to economic conditions. The weakness in the Asian
economies pushed prices below $10 per barrel at
the end of 1998. The U.S. recession which began
in March 2001 helped push oil prices from $32
a barrel to $17 a barrel by November 2001. Critics
of merger activities have argued that the likelihood
of successful mergers is small.
Prevailing market prices of the equity of firms
embody some probability of a takeover. In addition,
they argue that purchase prices include substantial
premiums requiring increases in values of acquired
firms not likely to be achieved. The Exxon-Mobil
combination provides counter evidence. Synergies
include improvements in the performance of all
the parties in the transaction. Premiums are usually
expressed as a percentage of the pre-merger market
cap of the target. These percentages can run high.
However, more relevant is the amount of the
premium in relation to the size of the combined
firm. The $15.5 billion premium to Mobil was 26.4%
of its market cap, but represented only 6.6% of
the combined pre-merger market cap. The $2.8 billion
pre-merger synergy estimate ($7 billion post-merger)
required only a modest valuation multiple to recover
the $15.5 billion premium (Andrade, Mitchell,
and Stafford, 2001).
A strategic change can often open amazing new
doors of opportunities for companies or signal
the beginning of the end – the key is planning.
Rational planning is extremely vital for the health
of a strategic change and this is the reason why
analytical tools such as the Porter five forces
model are very helpful during the entire process
which leads to the implementation of the change.
The executives at ExxonMobil did a lot of things
right when they planned the 1999 merger and so
far, the results have mostly been favorable. In
fact, benefits of the merger were greater than
expected and earlier forecasted. Today, the company
is progressing opportunities for profitable growth
across all of its businesses, the most seen for
many years, perhaps going back to at least the
1970’s. This strategic change should be
considered a classic example of a change which
was well planned and well executed. The merger
has definitely increased the scope of operations
for ExxonMobil making it truly a giant in today’s
oil industry.
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