Chevron Texaco Merger

What do you think the real reasons for Chevron Texaco merger are? Unlike previous mergers in the oil industry, it appears that the Chevron-Texaco merger was instigated more from a lack of size, than from a financial advantage. The two companies on a stand-alone basis could not effectively compete with the merged might of the likes of BP Amoco Arco, Exxon Mobil and TotalFinaElf.

There is some truth to oil management's arguments that they can increase cost-cutting and efficiency by merging. Particularly in the area of exploration and production, where in "new frontier" areas such as the former Soviet Union, risks are high both because of political and economic factors, such mergers increase the pool of capital available to one firm to take such high risks.

While it is less true in refining and marketing, mergers and joint ventures do allow economies of scale, through building new facilities on a larger scale or by shifting production to one refining facility while closing down another. However, the essence of such economies of scale is the reduction in the amount of labor needed to produce a given amount of output.

The Chevron Texaco merger might also have been motivated by management?s gain perspectives. Top management probably saw in this merger the opportunity to get larger salaries and ?golden parachutes? that would secure any possible future outcome of the merger. According to a Pearl Meyer & Partners study of the top 200 U.S. companies, 90 percent of a CEO's pay is tied to performance, and more than half of that pay is in stock-option grants. It's no longer unusual for the CEO's equity stake to top $100 million, and mergers often involve sizable new grants and generate major windfalls.

Ego could be a major factor in driving mergers, as executives want more recognition, more operations, and more money.

Management?s ego seems to have had a considerable weight in the process that led to the Chevron-Texaco merger. The reason why, in 1999, an earlier attempt of merger between chevron and Texaco was called off is because Texaco?s executives claimed to have been badly treated by Chevron, and one of the key reasons why the discussions foundered is believed to be Chevron's refusal to consider Texaco chairman Peter Bijur as a successor to counterpart Kenneth Derr after the latter's retirement.

Is it a good fit? Are their technologies and systems compatible (computers, etc.)? Are their cultures compatible? Part of the reason why the merger between Chevron and Texaco might be considered as a good fit is because they have many complementary operations internationally, including the US Gulf, Brazil, China and Southeast Asia, and West Africa, where the two companies have holdings generally well suited to consolidation.

The two companies have a long business relationship. For the past 65 years, they have co-owned a joint venture called Caltex Corp., which sells 1.8 million barrels of crude oil and petroleum products per day and operates in 55 countries. The fact that they are well-acquainted and have worked together for more than sixty years may help to speed up the process of integrating and saving money.

However, restructuring and relocation often mean many voluntary and involuntary redundancies. Both petroleum companies have huge global networks that reach many of the same oil-rich areas, and both have AT&T as their primary telecommunications provider. At a time when the entire oil and energy industry is reducing cost structures through mergers, combining global-area networks would represent significant IT cost savings.

But, with both oil companies having invested heavily in similar regions -- the U.K., Houston, Southeast Asia and the Caspian and North seas -- their wide-area network installations in those areas are probably redundant. If proper integration of the IT system is achieved, one of the key benefits of the merger will be a broader portfolio in advanced technologies, including e-commerce ventures.

Concerning the compatibility of their corporate culture, the two companies claim to share common values including: protection of the environment, active support for the communities where they operate, and promoting diversity and opportunity in their workforce and among their business partners. The fact that both companies are American and operate in the same line of business should help in the integrative process that they must endure.

Who will be laid-off? Why? Chevron Texaco plans to eliminate 7 percent of their combined work force of 57,000 worldwide, or about 4,000 jobs, mostly from overlapping management and back office operations. That is equivalent to around 10% of the combined payroll, or $400 million a year, and it is a major step for the company to achieve its expected savings of $1.2 billion a year.

Even though the company still has not displayed what specific positions it is going to cut, it is very likely that jobs that have become redundant and inflate unit cost will be the first targets. The concentration of both companies? activities will mean that in some cases a worker or a department will become able to perform the task previously performed by two.

The objective behind this is to increase productivity per worker while reducing the workforce. Workforce restructuring attempts to lower the break-even point of companies. With a lower break-even point, the risk of revenues being insufficient to cover costs is less. This is particularly important for capital-intensive companies such as oil companies.