Continuing super-low oil prices have driven two of the largestoil companies in the world into a friendly merger, with Exxonacquiring Mobil for $77.2 billion in stock, making the deal therichest corporate takeover ever. Exxon Mobil Corp. will be thelargest corporation in the world based on the two companies’combined revenue of $203 billion last year.

The deal comes at a time when oil prices are at a 12-year lowand it has added to the concern of many producers about theirprospects for weathering this market without taking some type ofsimilar action.

Mobil CEO L.A. Noto, who will be second in command at the newcompany, suggested during a Tuesday presentation that both Mobiland Exxon had reached the end of the road of cost cutting on theirown. “We need to face some facts. The world has changed. The easythings are behind us. The easy oil, the easy cost savings, they’redone. Both our organizations have pursued internal efficiencies tothe extent they could. Prices are low today, but that’s not whywe’re here. We’ve never really had protracted periods of highprices and high margins in our industry.”

“While we expect to benefit from a reduction of costs in theshort-term, our real objective is to maximize growth and return oninvestment by successfully managing the existing assets of Exxonand Mobil and by selecting the best projects from the largeportfolio of investment options that will be created by thismerger. Combining the proprietary technologies and managementexpertise of the two companies also will reinforce the selection ofExxon Mobil as the partner of choice, creating additional resourceopportunities in the future,” Noto and Exxon CEO L.R. Raymond saidin a joint statement.

Exxon Mobil would have combined gas sales of about 14 Bcf/dworldwide and major LNG assets contributed by Mobil. Exxon produces6.3 Bcf/d of gas and had gas/oil exploration/production activitiesin 30 countries at the end of 1997. Mobil produces 4.6 Bcf/d of gasand had gas/oil exploration/production activities in 25 countriesat the end of 1997. In the U.S., Exxon produced 2,062 MMcf/d in1997, while Mobil’s 1997 domestic production averaged 1,160 MMcf/d.Mobil has turned over its gas marketing activities to Duke EnergyMarketing in which it owns a 40% share. Exxon never developed asignificant gas trading organization, opting to continue to sellits gas primarily in long-term arrangements. It is too early totell what the marketing arrangements for the merged company willbe.

Under terms of the agreement, each share of Mobil will beconverted into 1.32015 shares of Exxon. As a result of the merger,Mobil shareholders will own about 30% of the company, while Exxonshareholders will own about 70%.

Exxon CEO Raymond will be chairman, CEO, and president of themerged company; and Noto will be vice chairman of the Exxon MobilBoard. Exxon Mobil will be headquartered in Exxon’s hometown ofIrving, TX, with worldwide downstream headquarters in Fairfax, VA,and worldwide upstream and chemical headquarters in Houston.

The companies predicted near-term pre-tax synergies of about$2.8 billion. The merger is subject to shareholder and regulatoryapproval, as well as other conditions. It is intended that themerger will qualify as a tax-free reorganization in the UnitedStates and that it will be accounted for on a pooling of interestsbasis. In addition, the merger agreement provides for payment oftermination fees of $1.5 billion under certain circumstances. Theparties also have entered in an option agreement that grants Exxonthe option under specified circumstances to purchase up to 14.9% ofthe authorized but un-issued common stock of Mobil.

The Exxon-Mobil transaction is expected to face stiff srutinyfrom the Justice Department, the Federal Trade Commission and fromattorneys general is states where the two energy companies have alarge retail marketing presence. To pass the muster, “I thinkthey’ll certainly have to be divestiture of some assets, mostlyservice stations [in the Northeast] and possibly some refineriesand stuff” in Texas and Louisiana, said John Sharp, vice presidentof federal and state affairs and counsel for the Natural Gas SupplyAssociation (NGSA). “While I think the FTC will scrutinize verymuch the joint assets of this proposed merger, I think ultimatelyit’ll certainly be approved. I don’t see antitrust problems as anykind of killer of this deal.”

Industry prognosticators predict other big merger deals are onthe horizon. “Chevron is certainly walking around looking forsomeone. I’m pretty confident that they were also in negotiationsat one point and time with Mobil. One thing that could possiblyhappen is Chevron and Texaco could get together. I wouldn’t doubtthat you’ll see something from Chevron pretty darn soon,” said aWashington energy observer. Atlantic Richfield Co., which ownsabout 80% of Vastar Gas, “is still a pretty attractive prospect forpeople,” as well as Oxy, Pennzoil, Phillips Petroleum, Unocal andMarathon Oil.

“I’d say there’s going to be a tremendous amount ofconsolidation in the industry. I don’t know if it’ll reacholigopoly stage…,” the observer noted. He stressed, however, thatthe goal of energy companies in combining their operations is torealize efficiencies. “These people aren’t getting together becauseit’s fun, they’re getting together because they see an economicopportunity.”

Like most others, he doesn’t believe that mixing the corporatecultures of Exxon and Mobil will be an easy task. But, he said,”either you work together or you don’t have a job.” It’s beenspeculated that up to 20,000 employees from both companies -probably moreso from Mobil – could be displaced by the deal.

©Copyright 1998 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.