Amoco. Chevron Corporation

Case Study: British Petroleum-Amoco Merger (Sources: NYT, BW, WSJ) British Petroleum announced in August 1998 that it would acquire the U.S. oil giant Amoco for $48.2 billion in stock in the largest oil industry merger ever. The deal also would be the largest takeover of a U.S. company by a foreign concern. The merger would result in a company in a position to vie with Exxon for second place behind industry leader Royal Dutch/Shell. The deal clearly benefits both BP and Amoco. The main strength of BP is looking for, and finding, oil reserves. Yet the company is weak in the business of refining oil into products and chemicals and distributing it to consumers, operations at which Amoco excels. Amoco also possesses significant natural gas reserves and petrochemicals.

The merger thus brings all these assets into a larger, far more comprehensive structure, making BP Amoco a true giant with enhanced structure. Investors surely liked the merger deal, as both companies’ stocks moved up as a result of the announcement, despite heavy losses elsewhere in global markets. Amoco shareholders will get 3.97 BP shares for each Amoco share. Consumers in the U.S. are unlikely to feel any immediate effects of the merger. Prices at gas pumps are mostly dependent on world oil supplies, which currently are plentiful; and while consolidation of gasoline outlets may decrease retail competition, the combined exploration potential of the company eventually could result in larger supplies of crude oil.

The merger will allow the companies to consolidate their spending and efforts on exploration, which would exceed that of Exxon and Royal Dutch/Shell. In addition, the merger would allow the companies to be more competitive in regions, like the former Soviet Union, China, and Latin America, where competition has increased as companies, especially national companies, seek new sources of revenue. The merger announcement, moreover, could set off a wave of consolidation in oil companies, not unlike that seen in the financial services and telecommunications industries. Until now, the major players in the oil industry have relied on joint ventures, rather than comprehensive acquisitions, to increase profitability.

Companies that now might consider similar moves are Mobil, Chevron, and Texaco, all of which saw their stocks rise in response to the merger announcement, despite a general downward drift in the U.S. stock market. It is expected that the deal will be approved by shareholders as well as federal regulators, although a merger of this magnitude will take months to be reviewed. Antitrust concerns do not appear to be a significant hurdle, but it is possible that problems could arise from overlapping service stations or refinery operations in some states, particularly in the U.S. midsection, which might require some divestitures to win regulatory approval.

The two companies employ a total of almost 100,000 workers worldwide. Amoco, with almost 44,000 employees expects to cut 5,000 to 6,000 jobs, mainly in its downstream operations, but none in its Chicago headquarters. BP said the company planned to cut about 1000 jobs in Cleveland, when refining and marketing operations there are moved to Chicago. Other cuts are expected at Amoco’s offices in Houston.

The merger is expected to bring about $2 billion in savings, as the companies eliminate redundancies and consolidate divisions. BP and Amoco stated that Chicago would be the headquarters for the new company’s North American operations in refining, marketing, and transportation, and eventually in its worldwide chemicals business. Amoco presently is the fourth largest company in the Chicago area.

The board of the new company, which will be based in London, will have 13 BP directors and 9 from Amoco. Although both companies characterize the deal as a merger, some analysts contend that it really looks like an acquisition by BP, which will control 60% of the new company. The move by BP is viewed as a strategic decision, providing the two companies considerable financial and economic benefits in the long term.

Sir John Browne, the chief executive of BP, will head the new company. He stated that the merger was forced by the need for economies of scale and by increasing competition in the global economy. In such a climate, the best investment opportunities, he emphasized, will go to companies that have the size and financial strength to take on truly large scale projects that offer truly distinctive returns. BP now definitely is in the “super-league” of competition. Browne’s counterpart at Amoco, Lawrence Fuller, will be co-chairperson of the new firm until his retirement in 2000.

Interestingly, both BP and Amoco descend at least in part from John d. Rockefeller’s Standard Oil empire, which was split up in the early part of this century by the federal government. BP of America was the former Standard Oil of Ohio, and Amoco was created from the former Standard Oil of Indiana. The combined company will have 9.2 billion barrels of crude oil in reserves. By merging with Amoco, BP will acquire 9,300 retail gasoline outlets, thus giving the new company 18,000 gasoline outlets worldwide. The new company also will be the largest natural gas producer in North America.

The merger, finally, will make BP the largest company in Great Britain, supplanting the pharmaceutical manufacturer Glaxo Wellcome. BP Amoco now will be able to control its own destiny, instead of having to settle for smaller stakes in joint ventures. BP, in fact, was willing to pay a 15% premium for Amoco because it viewed the firm as such a very good fit. The deal will boost immediately BP’s U.S. marketing efforts, which were viewed as weak. Its U.S. gasoline stations eventually all will come under the more appealing Amoco brand.

The BP brand will be used in Europe and elsewhere. Both companies also operate in the niche area of solar energy; and thus will pose a challenge to that market’s leader, Siemens of Germany. The deal puts pressure on all oil companies, by saying, in essence, that a firm has to be very, very large in order to be competitive. With development costs for new fields in the billions, only the largest companies are likely to gain access to giant fields where the biggest profits are made. Questions: Is the proposed BP-Amoco merger legal; and is it moral? Discuss.