Merger and Acquisition in US from 1990 to 2000

Ques: In the global oil sector the pace of strategic growth through mergers and acquisitions has paused during the past decade. Compare and contrast the conditions in the industry environment between the 1990s ad today which effected M+A?

Introduction

Merger and Acquisition in US from 1990 to 2000

Achieving synergies

Diversification of assets

Response to volatility in price

Merger and Acquisition post Global Financial crisis

Merger and Acquisition trend in the oil industry from 2013

Conclusion 

Reference

Mergers and acquisitions are very important for organizations to respond to the changing strategic environment. In order to maintain competitive advantage it is essential for organization to merge with strong companies. Successful companies can grow faster through the process of merger or acquisition by combining their strengths with the merged firms. Acquisition leads to extinction of the weaker companies as they are acquired by large and successful firms. But over the years there has been sharp decline in the strategic growth of the oil industry by merger and acquisitions. The intent around M&A has declined. Even after five years of the global financial crisis, companies are waiting for recovery in order to have a long term sustainable growth (Weston, Mitchell &Mulherin, 2004). The trend for merger and acquisition in the oil industry has declined in the 2013. The major trends seen in the oil industry in 2013 are both upward and downward.

The upward trend in the oil industry is as follows –

The oil prices have favored the oil weighted merger and acquisitions (Reuters, 2014).The availability of capital and the favor received from the corporate finance market has played a positive role in the confirmation of deal.Gas weighted producers have continued to balance their portfolios by acquiring oil assets.In Asia and the Caspian Sea regions oil companies are active and have made 10 largest deals in 2013 (Forbes, 2014).

The downward trend in the oil industry in 2013 is as follows –

Merger and acquisitions transactions are not preferred by Gas weighted companies. They do not want to add further gas assets. They tend to focus on a single horizon.Companies whose PE ratio is good are targeted for merger and acquisitions. But they have avoided the growth through merger and acquisitions. They have preferred to enter into the public market via IPOs (‘Trends Influencing Oil & Gas Mergers and Acquisitions’, 2014;p-1-2).

The US petroleum industry has witnessed 2600 transactions of merger and acquisitions between 1991 and 2000. The merger and acquisition was seen in upstream, mid-stream and downstream segments. 85 % of the merger and acquisition was seen in the upstream segment. On the other hand 13% of the merger and acquisition was seen in the downstream segment. 80% of the transactions were via merger where one company purchased one segment of the asset of another company. On the other hand 20% of the transaction was via acquisition.  The major reasons for the mergers in US in between 1990 and 2000 are as follows –

Merger and acquisitions increased the growth of the companies.  Still this is a fact that there was positive synergy via merger and acquisition.The companies were able to diversify their assets via merger and acquisition. Merger and acquisition led to reduction in capital expenditure.

Achieving synergies

In US petroleum industry merger and acquisition led to increase in the market concentration. This resulted in the rise of market power of the companies (United States of America Congressional Records, 2007). Between 1994 and 2002, the market concentration of the oil industry increased. It was found that 46 states in United States and District of Columbia experienced highly concentrated markets in 2002 in comparison to 1994.

In the US petroleum industry, merger and acquisition has led to change in various aspects of the market structure. Merger and acquisition has led to vertical integration. In order to achieve competitive advantage vertical integration in the US petroleum industry was necessary(Kokemuller, 2014). There have been 8 mergers during 1995 to 2001 which led to vertical integration of the US petroleum industry.The petroleum industry in the world has been influenced by three major entities. They are Standard oil, the seven sisters and the OPEC.

Merger and acquisition in the 1990s led to benefits to the oil companies. It led to positive synergy by combining the strengths of both the companies. This led to the increase in motivation among other oil companies for merger. It was beneficial for one oil company to perform two related activities than two specialized oil company perform them separately. This will lead to cost reduction. The synergy created by merger drive growth of the firm. Some significant mergers that occurred in the 1990s to 2000 are Sunoco’s acquisition of Pride Refining in the year 1999. They acquired the crude oil transportation and marketing business of the organization. And 1999 another acquisition created positive synergy was of Tesoro’s acquisition of BP Amoco’s West coast marine fuels.

Firms need to diversify their portfolio in order to maximize the profit. The petroleum industry merger led to increase in profit of firms(Reuters, 2014). In 1990s some of the firms increased their reserves of natural gas via acquisition. Oil firms want to merge or acquire gas companies, since oil and natural gas are produced jointly.  If the oil prices are low during a certain period of time, the sale of gas can serve as a cushion during low periods.In 1999, Dominion acquired Remington Energy Ltd (company that produces natural gas). This acquisition led to the increase in natural gas reserves of Dominion by one trillion cubic feet (PRnewswire.com, 2014).

According to the World Bank (2000), increase in volatility of the oil prices led to large number of mergers in the 1990s. The collapse in the process of crude oil in 1996 and 1998 made long term investment in the capital market difficult. This led to distress amongst the high cost producers. They became the takeover targets.

Shale gas exploration has affected the merger and acquisition across the countries. There has been tremendous growth in China as it has highest numbers of Shale gas reserves. They have entered into strategic partnership with foreign companies that have helped China to equip them with the necessary technology. An agreement was signed between USA and China in order to measure the shale gas reserves of USA and China. Technically China was helped by USA in the exploration of Gases.  Thus China could explore the gas with ease. The contract between the two countries was highly successful in exploring shale gas (Shale Gas: Global M&A Trends, 2014;p-1-15).

Diversification of assets

There have been several demergers in the oil industry since 1990 that has affected the various transactions of the oil industry. There has been demerger of Gulf oil , Reliance industries that has affected the overall scenario of merger and acquisition in the oil industry(Moneycontrol.com, 2014). The lubricant business of Gulf oil has been very successful They wanted to explore the market as a separate entity (Reporter, 2014). They wanted to start a large expansion project for the expansion of their business. Growth was the major motive of the demerger strategy of Gulf oil. This will improve the profitability of the organization. Demerger also affected the merger and acquisition in the oil industry (Gulfoilcorp.com, 2014); (Bureau, 2014).

The key reasons for the merger and Acquisition activities during 2008 are many. First and foremostis that there was increase in the activities in Oil field services (OFS) space which led to the rise in the contract prices. Another reason was increase in competition between the International oil companies and the National oil companies(JAFFE & SOLIGO, 2014; p-10-40); (Agashe, 2010; p-1). Also, the new entrants in the hydrocarbon sector were a major contributor of increased merger and acquisition.

Between 2008 and 2010 there was announcement of 650 oil and gas mergers. Among the deals announced, 69% of the deals achieved success. The merger activity was seen mostly in the upstream segment. 70 % of the deals were in the upstream segment. There was increase in the number of merger and acquisitions in the year 2009-10 than in 2008-09. The merger and acquisition in the oil industry was dominated by North America. They entered into 134 deals. The merger and acquisitions in the Middle East was limited in comparison to other countries. The most affected place was South America which signed only 19 deals between the periods of 2008 to 2010. In 2008 and 2010, USA and Canada were in the topmost position in making merger and acquisition deals. India was at the 11th position in signing the merger deals. Reliance was at the lead position from India in making the merger deal. They acquired 5% stake Chevron in the Reliance Petroleum limited. The largest merger and acquisition deal was by Suncor. Suncor acquired Petro Canada. These two companies became a globally competitive integrated energy company. They maintained a balance portfolio of high quality assets. After the merger, the balance sheet of the company became strong(ENERGY M&A TRENDS in Canada, 2014; p-1-8). This made the investors confident about the company. The merger of the two companies led to 300 million of annual savings by reducing the operating expenditure. It also increased the efficiency of the annual capital by 1 billion dollar. This was achieved by the elimination of the redundancies. High return capital budget investments were made.

 The reasons for the merger and acquisition during the period of 2008 and 2010 after the global financial crisis are many. The rise in the number of merger and acquisitions was a result of the financial distress of the small oil companies as a result of global financial crisis. Also the hefty prices that was paid for some of the deals were a result of the financial distress of some of the oil companies.Major oil companies that were involved in the upstream activities acquired oil and gas companies to increase their market sharewhich they were not able to sustain and develop (fas.org, 2012). The financial investors and the pension funds participated in the buyouts by investing in the oil and gas companies. These deals were majorly seen in North America and Europe.

Response to volatility in price

According to Deloitte (2010), financial difficulties of the major companies resulting from oil spill from their assets in the region of Gulf of Mexico resulted in increase of merger and acquisition.The midstream companies entered into merger and acquisition as it was a part of their forward integration strategy.Merger and acquisitions continued between midstream companies as a strategy for horizontal expansion. This resulted in covering larger and new markets for the growth of the organization.

The current market conditions are encouraging merger and acquisitions. The growth in the merger and acquisition activities in 2007 was 50% more than the previous year. The major driving factors for merger and acquisition during this period of time were increase in competition, entry of new players in the market, volatile oil prices(ey.com/, 2014).

 In 2013, the transactions of the upstream merger and acquisitions were the lowest(Ey.com, 2014).  From the period of 2010 to 2012, the merger and acquisitions of the upstream assets was around $600billion. The highest transaction was seen in 2012. But in 2013, there was a fall in the merger and acquisition transaction. It fell to $136 billion. There was a fall of 43 % from 2012 in the number of merger transactions. In 2013, China was the largest buyer in the oil and gas market worldwide. It has spent $22.2 billion(Gordon, Tao &Sautin, 2014).

The demand for energy is shifting towards the emerging economies like China, Middle East and India(How will global energy markets evolve to 2035? 2014; p-1-5). They have contributed for more than one third of the energy demand of the country. The development cycle of the emerging economies and Europe and North America are different. The difference is due to the shift in demand and growth of resources of the oil and gas companies in the emerging economies(Kaixi, 2014).

For the oil and gas industry, 2013 was a year that concentrated on the improvement of existing assets rather than the acquisition of new ones. The former three years saw a surge in merger and procurement (M&A) movement as the business concentrated on stretching grounds and boring rights to exploit high oil costs, seeking after rising unpredictable shale plays, and assessing oil sands prospects. In 2013, numerous makers concentrated on creating properties gained in earlier years – to be specific, on streamlining operations and boosting profits for resources. This stress on improvement and natural development helped a drop in both arrangement qualities and the aggregate number of arrangements finished. All around, the business saw a drop of 41 percent in arrangement values, from $349 billion in 2012 to $205 billion in 2013, and a fruition of 119 less arrangements in 2013 than in the earlier year.

The oilfield administrations area kept on being influenced by expense control endeavors of makers, as numerous bigger organizations started to concentrate on the productivity of advancement expenses, including merging the quantity of administrations and gear suppliers they contract, to help drive productivity and expense intensity. In 2013, the oilfield administrations area arrangement qualities were down, yet the number of transactions rose, which could show the segment might be ready for merging, particularly of littler organizations furthermore those with particular innovations. Private value likewise demonstrated an enthusiasm toward this area. While bargain movement keeps on being commanded by the investigation and creation (E&P) segment, the biggest arrangement of 2013 – the $6.7 billion buy of Repsol’s Latin American resources by Shell – originated from the midstream division. As we move into 2014, arrangement movement could move from the upstream division to midstream base and downstream operation.

Merger and Acquisition post Global Financial crisis

The focus of the global oil and gas companies in 2013 was developing the existing oil and gas companies instead of getting into new deals. They focused on organic growth rather than acquisition. This resulted in the decline in the number of deals in 2013 by 16%. Compared to 2012 there was a decline of 41% in the value of the deal. The major reason for the decline in the merger and acquisition transactions in 2013 was the uncertain economic and political conditions of the country. The budget battles and the shutdown of the government, uncertainty of the fed policies has led to the decline in strategic growth of the merger and acquisitions. The decline in was the largest in the period of five years. There was fall in the number of deals of United States and Canada by 21 percent. The decline in the number of transaction also extended to Middle East, Europe, Asia and Africa(pwc.com, 2013).

The major reasons for the decline in merger and acquisition transactions in 2013 are as follows –

The appetite for merger and acquisition declined as a result of the stability in the oil prices. The rise in the economic growth of the country with rise in demand could not affect the increase in merger transactions. The geopolitical upheavals in Libya, Syria could not affect the oil industry in US. The US shale offset the impact of the geopolitical disturbances in the world. So, the buyers in the previous years had turned into sellers in the 2013. The greatest example of this is the sale by Suncor. It sold its natural gas business(Snow, 2011).

In spite of the decline in the merger and acquisition transactions in 2013, the business hints at a bounce back heading into 2014. Cool climate is relied upon to give a support to common gas costs, which have seen a late uptick in the United States also crossed $5.50/mmbtu in late January 2014, the largest amounts since February 2010.3 Remote financial specialists likewise keep on focusing on securing North American supplies. Restored discourse of changes, particularly as they relate to oil industry procurements, for example, the treatment of elusive penetrating expenses, could goad more movement in 2014. In the meantime, the Federal Reserve’s report that it will end its financial jolt project could reason investment rates to climb, along these lines making a motivating force to finish bargains before obtaining expenses increment. The remark of the Federal Reserve will provide more clarity to the merger and acquisition transactions in 2014. Private value firms have put intensely in vitality as a resource class, riding the wave of action that started with the shale blast. As the three- to five-year skyline numerous firms look for a return comes into center and trusts see great estimating open doors, more may look to adapt their interests in 2014. Late raising support endeavors for vitality centered trusts will keep on driving private value interest in the space.

Canada will keep on being an appealing venture, particularly for majors and substantial incorporated organizations searching for lower-hazard ventures. Canada proceeds to be seen as a generally steady environment regarding making a venture versus other worldwide open doors. While ventures north of the outskirt may collect more consideration in 2014, substantial U.S. organizations will be looking southward too. Late changes in Mexico are opening up that conceivably lucrative business to outside speculation shockingly since the business was nationalized in 1938. That could energize joint wander and acquisitions on both sides of the fringe, as Mexico’s national oil organization, PetróleosMexicanos, or Pemex, may look to overhaul its mastery. Arrangement stream may increment in 2014 as organizations are tested to look for more funding to discover assets, complete undertakings, and keep up store substitution proportions over 100 percent. In the long haul, the level of interest in North America required to keep up present levels of yield and meet anticipated future long haul interest is relied upon to drive an enormous level of well action and oil sands advancement, which will proceed down the worth chain(Rothenbuecher&Schrottke, 2014); (PwC, 2014). 

Conclusion

 The trend of merger and acquisition has been changed significantly. In 1990s there was a rise in the transaction of merger in the oil industry but 2013 saw a decline in the number of merger transactions. Oil industry is one largest industry in the world. Merger and acquisition will drive the growth of this industry. The major reasons for merger of the oil industry are creation of synergy, diversification of the assets, and increase in market share and reduction in costs. These factors has surged the growth of merger and acquisition from 1990 to 2012. The factors leading to the decline in merger and acquisition in 2013 are political conditions of the country, lack of interest to make new deals and uncertainty in the Federal Reserve policies.

 References

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