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Industry Awaits Outcome of Exxon, Mobil Merger Talks
An announcement of the outcome of the merger talks between ExxonCorp. and Mobil Corp. is widely expected to occur today, with mostexpert industry-watchers anticipating the two energy behemoths willproduce a definitive deal, while a few say it’s still too close tocall.
As late as Monday, analysts and specialists were betting thatExxon and Mobil will come to terms on a deal to create a titan withmore than 20 billion barrels equivalent of oil and gas reserves..”I’ve heard on the street [that] it’s a done deal,” one energyinsider told NGI. A gas producer source agreed, saying the twocompanies “would probably announce something positive in the way ofthe merger” today. However, a lawyer specializing in mergers calledit a “toss up,” given the number and difficulty of themerger-related issues that are involved.
According to Edward Jones analyst Kate Warne, Mobil could fetch$92 to $93 per share in a deal with an equity price of $75 billion.Add to that about $7 billion in Mobil debt Exxon would probablyassume for a deal worth about $82 billion. Exxon is the largestU.S. oil and gas company and on a global scale is second in sizeonly to Royal Dutch-Shell Group. Mobil is the second largest U.S.oil and gas company following Exxon and the fourth largest in theworld. Exxon-Mobil would unseat Shell as the world’s largest oilcompany.
Exxon and Mobil in a press statement last week “made it quiteclear that there was not a deal yet, and that there might not beone. There are obviously tremendous issues besides price that haveto be resolved first,” said Michael P. O’Brien, a partner in theBoston-based law firm of Bingham Dana L.L.P. A key issue, hepointed out, is the combining of the “corporate cultures – is thisgoing to be a merger of equals or is it going to be an acquisitionof Mobil by Exxon.” He doubts it can be considered the former,given that Exxon’s market capitalization is about three times thatof Mobil’s.
The gas producer source said Exxon and Mobil had “very, verydifferent cultures,” and that merging them would be difficult, ifnot impossible. The majority of Exxon’s top and middle managementhail from Texas, while Mobil’s work force is “very eclectic,” hesaid. “If there’s any company that’s a melting pot, it’s Mobil.” Hethinks many of Mobil’s high- and middle-level executives are goingto be out of jobs if the merger goes through. “If I were a vicepresident or a senior vice president at Mobil, I’d either try toquash the deal for my own survival sake or I’d get my resume out onthe market real quick.” He expects to see “some resistance”internally from Mobil employees to the transaction.
Other tough issues will include “corporate headquarters – willMobil be permitted to maintain its Virginia corporate headquartersor not; board representation – how many seats will Mobil get on thecombined company’s board; corporate name – is it just going to beExxon or will there be some new name that links the two [companies]in some fashion; and the CEOs – how will they fit into themanagement of the surviving company,” said O’Brien. “Because theissues that need to be resolved…are so significant,” he’s notsure a definitive merger agreement between the two major producersis assured. “I would say at this point it could go either way.”
In the event Exxon and Mobil reach a definitive agreement andthe deal goes through, it will be by far the largest merger ever ofindustrial companies based on market capitalization. Exxon has amarket capitalization of about $170 billion, while Mobil’s marketcapitalization (prior to the run-up in its stock price last week)hovers around $70 billion, making the combined marketcapitalization about $240 billion. An Exxon-Mobil marriage wouldeclipse the British Petroleum-Amoco Corp. announced last August,which is pending antitrust review.
“The biggest risk (to an Exxon-Mobil merger) will be antitrustin that the antitrust regulators in the U.S. have been quiteaggressive over the past year and a half or so. If they find aproblem with BP-Amoco, they’ll certainly have a problem withExxon-Mobil,” O’Brien said. The producer source agreed, sayingExxon and Mobil are “too big a set of companies to be ignored bythe Justice Department and the Federal Trade Commission.”
Still, O’Brien believes that both Exxon and Mobil could arguethat the merger would pose no competitive concerns since oil is an”international commodity which is beyond the power of U.S. oilcompanies to manipulate.” He believes “very strong arguments can bemade and no doubt will be made” on this score.
Jofree Corp. analyst Carol Freedenthal said that any antitrustissues would mainly relate to the oil side of the business as Mobilturned over its gas marketing group to PanEnergy, since acquired byDuke Energy. Mobil retained a 40% interest in the unit. “Exxon hasdone very little to develop their [gas] group. It’s really a gassales group and not what I would call marketing..”
The Exxon-Mobil transaction, if approved, would set the stagefor more mergers in the energy industry, primarily as defensivemeasures. “Mergers develop a certain momentum. If you see that twoof your biggest competitors have gotten together, you may feel thatwill give them further competitive advantages, …so you startlooking around for other available partners,” O’Brien said.
Allen Mesch, director of the Maguire Oil and Gas Institute atSouthern Methodist University in Dallas, said an Exxon-Mobil dealwould be a harbinger of things to come for a couple of reasons.”When one company sees another doing something like this, they willfollow suit. The other [reason] is sort of a competitive response.They will say, ‘If everybody else is getting bigger, we need to getbigger.’I think both of those things will create some urgency onthe part of some boards.” With this latest mega-merger on thehorizon now, analysts are positing candidates for the next bigdeal. Among them are Texaco, Chevron, and Arco. “The shoe iswaiting to fall with those guys,” said Mesch.
If Exxon were to acquire Mobil, it would undo part of what theU.S. Supreme Court did in 1911 when it busted apart the StandardOil Trust. Mobil’s ancestor companies were Standard Oil Co. of NewYork and Vacuum Oil, two of the companies making up Standard Oilbefore the break-up. Before it was Exxon, Exxon was Standard OilCo. of New Jersey, the largest of the companies formed by the trustbreak-up.
Exxon, headquartered in Irving, TX, had 1997 sales of $137.2billion and profit of $8.5 billion. Mobil, headquartered inFairfax, VA, had 1997 sales of $65.9 billion and profit of $3.3billion. Exxon has about 80,000 employees, and Mobil has about42,700.
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