The Merger Of Bp And Amoco
British Petroleum and Amoco announced their merger on August 11th of 1998 as the largest industrial merger in history worldwide. Initially the plan was to convert all the BP service stations in the United States into Amoco, whereas overseas all the Amoco service stations were supposed to be converted into BPs.
However, in 2001 BP announced that all Amoco service stations would be renamed into BP while some others would be closed or disposed of, leading to an entire rebranding of Amoco Fuels.
During 2008, almost all “Amoco Fuels” service stations had been restored by “BP Gasoline with Invigorate” and just a few of them remained operations under the original Amoco brand’s name.
On April 2010, Chevron purchased some of the remaining Amoco Fuel service stations, mostly in Mississippi and converted them into Texaco service stations.
After the spill in the Gulf of Mexico from Deepwater Horizon, BP considered to rebrand their US based operations back into Amoco Fuels as the company suffered a decline in sales on account of the negative publicity associated with the incident.
Company’s background:
In 1909, the Anglo-Persian Oil Company (APOC) was incorporated as a subsidiary of Burmah Oil Company to exploit a concession to search for oil in Iran. By 1935, it became the Anglo-Iranian Oil Company (AIOC), but after the assassination of the pro-western Prime Minister Ali Razmara, the oil industry in Iran was nationalized and National Iranian Oil Company was formed displacing the AIOC. By the time, the British government owned the AIOC and contested the nationalization at the International Court of Justice at The Hague, but its complaint was dismissed.
However, in 1953, National Iranian Oil Company became an international consortium, and AIOC resumed operations in Iran as a member of it. The AIOC became the British Petroleum Company in 1954 and the British government was controlling it again.
In 1959 the company expanded beyond the Middle East to Alaska and by 1978 it acquired a controlling interest in Standard Oil of Ohio.
Nevertheless, British Petroleum Company continued operating from Iran until the Islamic Revolution in 1979, when the new regime confiscated all of the company’s assets within the country without compensation, bringing the end of the British 70 years presence in Iran.
Between 1979 and 1987, the British government’s entire holding on the company was sold to several private investors and in 1987, British Petroleum negotiated the acquisition of Britoil.
Moreover, Standard Oil of California and Gulf Oil had merged in 1984, it what would be known as the largest merger in history at that time; however the antitrust regulation relented many of its operating subsidiaries in the Gulf and sold some stations and a refinery in the eastern United States, allowing British Petroleum to acquire most of them.
Finally, John Browne, who had been on the board as managing director since 1991, was appointed group chief executive in 1995. Browne is considered the responsible for BP’s three major acquisitions; Amoco, ARCO and Burmah Castrol.
Development of the merger:
In 1997 BP and Amoco net income was US$ 4.6 billion and US$ 2.7 billion respectively. Combined revenues were US$ 108 billion and capital employed US$ 57 billion. The combined market capitalization was calculated around US$ 110 billion, a figure which would place the newly formed corporation among the top three oil companies in the world.
The deal was expected to deliver synergies from cost savings that would add at least US$ 2 billion pre-tax a year by the end of 2000 to the earnings already separately targeted by the 2 companies.
Finally, when British Petroleum merged with Amoco in December 1998 the company also acquired Burmah Castrol plc. and Arco (Atlantic Richfield Co.) closing the deal in early 2000.
BP continued selling Amoco branded petrol even in service stations with the BP identity since Amoco had been rated as the best petroleum brand by consumers for 16 consecutive years comparable only to Chevron and Shell.
In 2008, the high grade available petrol from BP (BP Gasoline with Invigorate) was still called Amoco Ultimate and BP decided to move it as most of its petrochemical businesses into a separate entity called Innovene within the BP Group.
Terms agreed for the merger:
The pre-merger negotiations conducted between the two companies were relatively fast compared to other transactions in the same scale. The benefits expected both companies were easily identified and agreements were developed in a friendly manner.
The terms were disclosed immediately and were summarized as following:
Value of the merger: US$ 53 billion
Merger deal instrument: share swap (exchange of stock)
Exchange Ratio agreed: Amoco shareholders were offered 3.97 BP shares for each share of Amoco common stock
Amoco shareholders premium above BP’s current market value: 25%
Increase in number of shares after the merger: 15%
Shareholders structure after merger: 60% BP shareholders – 40% Amoco shareholders
Headquarters of the new company after merger: BP Amoco plc. headquarters remained in London and Amoco’s head office became the headquarters for the company’s North American operations
Trading market for the companies: BP and Amoco shares would remain listed on the London Stock Exchange and New York Stock Exchange
Company’s management structure after merger: BP’s CEO Sir John Brown would continue leading the company co-chaired by BP’s chairman Peter Sutherland and Amoco’s chairman Larry Fuller
Staff cuts after merger: BP Amoco plc. confirmed cost reductions from a cut-off in personnel; the two groups had 99,450 employees together, with BP employing 56,450 and Amoco the rest. The reduction in first stage would represent 11% to 13% of the total
Combined reserves: 14.8 billion barrels. Serving 17,900 BP service stations around the world and 9,300 Amoco service stations all in the US
Options pegged to the merger: Amoco granted BP an option to purchase 189,783,270 shares of Amoco common stock at a price of US$ 41 per share. This represented approximately 19.9 % of the outstanding Amoco’s common stock
Dividend payout after the merger: Both companies would continue to pay quarterly dividends in the ordinary course prior to the implementation of the merger, then its dividend policy was to continue paying 4 dividends a year and with a payout of approximately 50 % of through cycle earnings
The Merger Agreement would also provide termination fees to be paid by one party to the other under certain circumstances. The circumstances in which either party is able to terminate the Merger Agreement include:
If either Amoco or BP shareholders do not approve the merger and related transactions
If the other party enters into negotiations with any other person in relation to an acquisition offer for that party
If the board of the other party withdraws or adversely modifies its approval related to the merger
Market conditions leading to the merger:
In order to get a better understanding about why the BP-Amoco merger is considered as one of the most successful mergers in history and which factors contributed to given success, it is important to deem about the different aspects from the oil industry market that either the management and the shareholders from both companies took into account to be convinced that the transaction would only add value and the risks would be covered:
Oil prices worldwide were depressed and had fallen to their lowest levels in over a decade
The price of a barrel of Brent crude oil had decreased to US$11.8 in real terms; the lowest price in 25 years
No oil company of any significant size was immune to a takeover threat during the early 1990s; their stock prices were depressed. It was cheaper to buy oil reserves on Wall Street than by exploration and development outlays. These pressures caused the major oil companies to engage in a wide range of restructuring activities and costs reductions
Restructuring efforts and improvements in technologies had lowered costs to US$16 to US$18 per barrel. Oil prices declined to US$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 US$11 to US$12 per barrel range
Amoco had reported the month before a fall of more than 50% in second quarter earnings
Amoco, being the fourth largest US oil producer, was hurt by its lack of international refining
Combining the chemicals operations of BP and Amoco would create a business with revenues of US$ 13 billion that together with the strengths of BP in Europe and Amoco in the US would provide a powerful platform for expansion in Asia where both companies already had significant investments
The new chemicals business would be one of the world’s largest petrochemicals companies, with leading positions in 7 core products: acetic acid, acrylonitrile, aromatics, purified terephthalic acid (PTA), alpha-olefins, purified isophthalic acid (PIA) and polypropylene. A diversified portfolio of key proprietary technologies
Best practices in acquisitions issues indicated that the successful mergers carried out in previous years tended to be those in which the goods or services offered by the companies involved in the transaction were highly similar, contrasting mergers between companies seeking to combine different markets and diversify its business. The latter were considerably more risky and the probability of failure was higher
Features of BP-Amoco merger versus Daimler-Chrysler merger:
In contrasting the BP and Amoco merger to Daimler and Chrysler, it is important to outline the main differences both in the pre-merger requisite as well as the merger implementation. Particularly, with regard to each company’s ability to adapt to the changes after the merger and the manner in which the target markets would accept the new company.
The acquisition of Chrysler marked the first time one of the Detroit Big Three automakers would be in the hands of a private equity firm. There are those who say the merger, which faced significant cultural differences, was doomed from the start.
Originally, the plan was for Chrysler to use Daimler parts, components and even vehicle architecture to sharply reduce the cost to produce future vehicles. But problems surfaced when Daimler’s Mercedes-Benz luxury division, whose components Chrysler would use, was averse to contribute to Chrysler. Further, the immediate perception of the market was that the new company would produce vehicles with lower quality standards
Both automakers wanted to enter markets overseas that they had never explored before, and that consumers would be unwilling to accept such change.
In the contrary to the car industry, the oil industry had been, arguably more than any other industry, forced to adjust to the massive change forces of globalization and entrepreneurial innovations. It stands out from most other industries in many ways, one being the existence of a truly global market in which 53% of the total volume is traded internationally. Oil itself accounts for about 10% of total world trade, more than any other commodity.
Furthermore, there are some other key factors that contributed specifically to BP-Amoco merger success compared to Daimler-Chrysler such as:
Amoco and BP believed that the bigger companies among the industry would win the best opportunities
Amoco and BP’s merger was cataloged by the oil industry’s experts as “one superb alliance of equals with complementary strategic and geographical strengths which effectively creates a new super-major that can better serve millions of customers worldwide”
It was known that within the oil industry, the best investment opportunities would go increasingly to companies that had the size and financial strength to take on those large-scale projects that offer a truly distinctive return
There were accounting reasons in both companies why the merger would be more appropriate and would create value
Amoco had a lack of international refining. Nonetheless, it also had important findings from research and development technologies to offer (a deal with an oil major was only a matter of time)
Both, BP and Amoco had significant investments in solar energy and share strong records and reputations for sound operating practices, environmental and social responsibility. It was easy to predict that they were able to share the same practices and therefore the same markets
Quite the opposite, Daimler-Chrysler never considered that their businesses were focused on different markets in terms of geographies, type of vehicles and prices. In addition to that, with regard to Chrysler, markets for passenger cars and commercial vehicles were deteriorated at the time of the merger (low growth expectations)
In addition, the adaptation of automotive companies after the merger would be much slower than that of oil companies given the production practices of each of the parties. In other words, the extraction of oil was very similar whereas car production had significant differences
Conclusions:
According to Berkovitch and Narayanan2) there are three major types of motivations for mergers: synergy, hubris, and agency problems. BP-Amoco merger met the three of them:
Synergy: efficiency objectives were promised and achieved; costs were reduced by adoptions of best practices from both companies, particularly in combining advanced technologies. The market cap of the company after the merger resulted 12.5% higher than the sum of both companies market cap.
Hubris: this motivation may be reflected in overpaying for the target; in this case, Amoco’s shareholders’ premium outcome was around 25%, higher than any other merger premium negotiated within the industry.
Agency problems: Since the Return on Equity (ROE) and the Return on Capital Employed (ROCE) increased after the merger, it can be assume that the management and shareholders targets were well aligned and therefore agency problems were not implied.
Moreover, divergent from Daimler-Chrysler merger; the reasons, the structure, and the implementation of the BP-Amoco transaction reflected the characteristics provided by the oil and gas industry to ensure the success of the merger:
There are no significant differences between the product from different brands (petrol is pretty much the same, no matter who extracts it).
The industry increasingly utilizes advanced technology in exploration, production, refining, and in the logistics of its operations (it is evident the cost reduction since all the companies require the same expenditures)
According to the market conditions related to the oil industry mentioned before, the BP-Amoco merger was convenient and almost needed to push the barriers surrounding the industry as the fall in crude prices and the high costs regarding exploration and development that were required to further increase its production.
Concerning to Daimler-Chrysler, many factors were not considered before the merger and limited the achievement of outcomes expected, mainly on issues of marketing, synergies in production and work culture.
http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/A/ARCO_Key_facts_and_operating_statistics.pdf “Mergers and Acquisitions – ARCO”. 2008
Berkovitch, Elazar and M. P. Narayanan, 1993, “Motives for Takeovers: An Empirical Investigation,” Journal of Financial & Quantitative Analysis, 28 (No. 3, September), 347-362.
http://www.adb.online.anu.edu.au/biogs/A080230b.htm. “Australian Dictionary of Biography”. Retrieved 5 Jun. 2010
Copeland, Tom, Tim Koller, and Jack Murrin, 2000, Valuation: Measuring and Managing the Values of Companies, 3rd ed., New York, NY, John Wiley & Sons.
http://en.wikipedia.org/wiki/BP
ANNEXES
BP Recent financial data in millions of US$
Year
2002
2003
2004
2005
2006
2007
2008
Sales
180,186
236,045
294,849
249,465
265,906
284,365
361,341
EBITDA
22,941
28,200
37,825
41,453
44,835
Net results
6,845
10,267
15,961
22,341
22,000
20,845
21,157
Net debt
20,273
20,193
21,607
16,202
16,202
Order Now