Exxon and Mobil to Merge

Exxon and Mobil to Merge

On a chilly spring day in 1911, the decision reverberated through the executive offices of the Standard Oil Trust like a thunderclap: the world's biggest oil company was to be broken into 34 corporate pieces by order of the U.S. government. Upon hearing this, John D. Archbold, a hard-drinking associate of founder John D. Rockefeller, began to whistle. History does not record whether Archbold, noted for both his sense of humor and his relentless desire for profit, was whistling to break the tension or because he saw some secret joke in a development his colleagues found catastrophic. But if there is a Rockefeller heaven for the people who created one of the greatest industrial combinations of all time, Archbold would surely be whistling now - in amused delight. For what the U.S. government had split asunder in 1911, market forces in 1998 were joining back together. Two of the biggest pieces of the Rockefeller oil trust, Standard of New Jersey and Standard of New York - now known as Exxon Corp. and Mobil Corp. - had agreed to merge.

The course of 87 years has brought deeper changes to the companies than just their names. Both have developed worldwide scope and both have moved their headquarters, Exxon to the Dallas suburb of Irving and Mobil to the Washington satellite of Fairfax, Va. But Archbold and Rockefeller might appreciate the irony that part of the motivation for the $124.2-billion deal comes from the weakening power of the OPEC cartel and the related fall in oil prices. The very creation of the trust in the closing decades of the last century was based on Rockefeller's belief that producers of oil would never be able to muster the discipline to control prices for very long and that only powerful corporations such as his could bring order from price-cutting chaos. With crude prices now at their lowest in more than a decade, Exxon and Mobil hope the merger will produce cost savings of at least $4.2 billion a year. "The world has changed," said Mobil chairman Lucio Noto as the agreement was announced. "The easy things are behind us."

The deal creating the world's largest corporation will also bring together the Canadian offspring: Imperial Oil Ltd., controlled by Exxon, and Mobil Oil Canada Ltd., a wholly owned subsidiary of its U.S. parent. Imperial, based in Toronto, is Canada's oldest and biggest oil company with operations in all sectors of the industry; Calgary-based Mobil, with no refineries or gas stations, is the industry leader in offshore exploration and production on the East Coast.

The Exxon-Mobil marriage is just the latest in a hectic pace of corporate unions this year - in the oilpatch and other industries - as companies in Canada and around the world try to come to terms with the impact of globalization, the Asian economic crisis and frenetic technological change. Also last week, Total SA - the second-largest French oil company - announced plans to buy Belgian-owned PetroFina SA, making it the world's fourth-biggest oil company. As well, Germany's Deutsche Bank AG said it will acquire U.S.-based Bankers Trust New York Corp. for $15.5 billion, forming the world's biggest financial institution. "Entire industries are being restructured now," says Bill Macdonald, a former Imperial Oil director and president of W. A. Macdonald Associates Inc. of Toronto, which advises companies on strategic planning.

If it receives regulatory approval, the new company will be known as Exxon Mobil Corp., and, while many operational details are being sorted out, one thing is obvious: it will be big - very big. It will produce more crude oil than Kuwait. Combined revenues last year were $247 billion, about 40 per cent more than second-ranked Royal Dutch/Shell Group. It will have more than 46,000 gas stations and refine more oil than any other publicly traded company. The new entity will, officials said, have the corporate muscle to undertake huge projects in areas such as Russia and the ocean floor, and the financial strength to withstand low prices. The deal will be accomplished by a share swap, with no cash changing hands. Exxon shareholders will own about 70 per cent of the new firm.

In Canada, it will take time before the exact form of the merger will be known, according to officials of both companies. The Canadian end of the union is complicated by the fact that Exxon owns only 70 per cent of Imperial, enough for control but not enough to act without considering the interests of minority shareholders in the publicly traded company. "Imperial Oil is not a direct party to the agreement," said company spokesman Richard O'Farrell. "The implications for what the merger means to Imperial Oil are yet to be determined."

Under the most likely Canadian scenario, industry experts say, Imperial would buy Mobil's assets in Canada - but the price paid would have to respect the interests of all Imperial shareholders, not just Exxon. John Clarke, senior oil analyst at Deutsche Bank Securities Ltd. in Toronto, values Mobil's Canadian operations at about $4 billion. Leaving the Canadian assets in separate corporate hands would frustrate the goal of the U.S. parents to extract maximum profits by combining all operations worldwide.

Imperial Oil and Mobil Canada have operations that analysts think would work well together, with almost no duplication "The fit is very, very good," says Arne Nielsen, who helped build Mobil Canada and retired as president and CEO in 1990. He is now chairman of Shiningbank Energy Management Inc., a Calgary oil company. Imperial, formed in 1880 to fight the entry of U.S. companies into the Canadian market and bought by Standard Oil in 1899, is Canada's biggest oil producer, its biggest refiner, and has the country's largest network of 2,600 gas stations (their Esso brand name comes from Standard Oil's initials). It was Imperial that ushered in the Alberta oil boom with its Leduc discovery in 1947, but the company has recently shifted attention away from conventional sources in Western Canada to the oilsands in northern Alberta, including a 25-per-cent stake in Syncrude Canada Ltd., which produces more than 10 per cent of Canada's crude. Imperial is also a major producer of heavy oil.

Mobil's Canadian subsidiary, which started in 1940, operates solely in what the industry calls the upstream - the exploration and production of oil and natural gas, and has no refineries or gas stations. Most prominently, the company is the lead partner in the Hibernia oilfield on Newfoundland's Grand Banks and in the Sable Island gas project off Nova Scotia. "Mobil's principal strategy has been the East Coast," says Gordon Jaremko, editor of the trade magazine Oilweek in Calgary.

The areas where the two Canadian companies have overlapping operations are limited. That makes employees of the two firms happy. Internationally, about seven per cent of the combined Exxon-Mobil workforce of 123,000 could lose their jobs as the new company cuts costs. In Canada, Imperial has about 7,100 employees, Mobil 950. But given the lack of duplication, even the union representing about 500 Imperial employees isn't worried. "At the outset, we can't see any negative implications in Canada," says Rolf Nielsen, a vice-president of the Communications, Energy and Paperworkers Union of Canada in Edmonton.

Jaremko says one project that could be in jeopardy is Mobil's planned $1-billion Kearl oilsands operation in northern Alberta. With oil prices so low, "It's hard to be enthusiastic" about such a proposal, he says. And if Canadian assets are combined, Imperial could decide to get rid of less-productive oil and gas fields, says Deutsche Bank's Clarke. "They'll keep the best and shop the rest." Such an asset sale would please junior Canadian companies. Arne Nielsen for one, in his new role at Shiningbank, hopes some attractive properties come on the market as a result of the merger. "I think there will be assets available," he said.

Before the merger can happen, it will take months of planning - the companies do not expect to have details available until next spring - and regulatory approvals in Canada, the United States and other countries where the two companies operate. Canada's federal competition bureau will review the proposal and could co-operate with foreign antitrust authorities, says Michael Sullivan, the bureau's acting mergers chief. But observers expect few problems in Canada because Mobil does not compete in the sale and marketing of petroleum products. In addition, Clarke notes, the level of Canadian ownership in exploration and development will not be reduced because both companies are U.S.-owned. But in the United States and Europe, where both Exxon and Mobil are involved in retail gasoline sales, the merger is likely to raise more antitrust flags. Exxon is the largest U.S. oil company, Mobil is second largest. Under their agreement, Exxon has the right to pull out if competition agencies block the deal or try to force significant changes. The antitrust investigation in the United States could take a year.

The wave of corporate combinations in Canada has left the mergers branch of the competition bureau borrowing experts from other divisions as well as hiring new staff. The number of company marriages considered by the agency has more than doubled in four years, from 193 in the 1994-1995 fiscal year to about 500 expected this year, Sullivan says. Elsewhere, the merger wave is so powerful that all 10 of the largest mergers in history involving U.S. companies were announced this year, including such blue-chip icons as AT&T; Corp. and Chrysler Corp. In the oilpatch, giant British Petroleum said in August that it had an agreement to buy U.S.-based Amoco Corp. - another vestige of the Standard Oil Trust - for $92.2 billion and smaller companies have followed suit. Against the trend, Royal Dutch/Shell Group and Texaco Inc. said last week they were calling off their proposed union of European refining and marketing operations, saying only that the deal "wouldn't maximize shareholder value."

The oil deals are driven by many factors, but none is as powerful as the falling price of crude, which closed at week's end at $10.92 (U.S.) a barrel. "A lot of this is being done out of a sense of weakness, not strength," says Clarke. "Costs have to be ripped out of the system." The pressures to do so are enormous. In the last year, the price of benchmark West Texas Intermediate crude has fallen 39 per cent. Adjusted for inflation, prices have not been lower since 1972. Members of OPEC met late last month in an attempt to put a floor under the slide but failed. With crude at about 50 cents a gallon in Canadian funds, bottled water now costs more. And as oil has fallen, so have prices at the gas pumps.

Companies in the oil industry and other sectors face what consultant Macdonald calls a new global crisis in which excess capacity and technological and other changes have turned the traditional business model on its head. Where prices could once be based on costs and passed on to consumers, companies must now increasingly slash their costs to meet falling price targets. "That's the world we're in," says Macdonald. John D. Rockefeller knew it well.

THE WORLD'S TOP OIL COMPANIES:

1997 revenues in billions

Exxon Corp. (U.S.) $166.5

Mobil Corp. (U.S.) 80.9

combined 247.4

Royal Dutch/Shell Group (The Netherlands) 178.2

The British Petroleum Co. PLC (Britain) 99.4

AMOCO CORP. (U.S.) 44.2

combined 143.6

Total SA (France) 43.9

PetroFina SA (Belgium) 27.1

combined 71

Texaco Inc. (U.S.) 62.6

Elf Aquitaine (France) 58.6

ENI SpA (Italy) 52.6*

Chevron Corp. (U.S.) 48.5

*1996

CANADIAN UNITY:

Largest mergers involving Canadian companies (estimated values):

1 Royal Bank-Bank of Montreal $39.9 billion; announced on Jan. 23

2 CIBC-Toronto Dominion Bank $29.6 billion; announced on April 17

3 The Seagram Co. Ltd.-PolyGram NV (Netherlands) $15.1 billion; announced on May 21

4 Nova Corp.-TransCanada PipeLines Ltd. $14 billion; announced on Jan. 22

5 Northern Telecom Ltd.-Bay Networks Inc. (U.S.) $9.9 billion; announced on May 13

6 The Thomson Corp.-West Publishing Co. (U.S.) $4.7 billion; announced on Feb. 26, 1996

7 Telus Corp.-BC Telecom Inc. $4.6 billion; announced on Oct. 19

8 Teleglobe Inc.-Excel Communications Inc. (U.S.) $4.6 billion; announced on June 15

9 Inco Ltd.-Diamond Fields Resources Inc. $4.3 billion; announced on Feb. 10, 1996

10 Stone-Consolidated Corp.-Abitibi-Price Inc. $4.1 billion; announced on Feb. 14, 1997

Source: Banks; Crosbie & Co. Inc.

BIG DEALS:

Top corporate mergers and acquisitions. Values of pending deals are based on Dec. 1 closing share prices and include assumed debt where applicable.

1. Exxon Corp.-Mobil Corp. $124.2 billion. Pending.

2. Bell Atlantic Corp.-GTE Corp. $119.3 billion. Pending.

3. SBC Communications Inc.-Ameritech Corp. $113.4 billion. Pending.

4. The British Petroleum Co. PLC-Amoco Corp. $94.4 billion. Pending.

5. WorldCom Inc.-MCI Communications Corp. $69.6 billion. Completed Sept. 14.

6. AT&T; Corp.-Tele-Communications Inc. $69.1 billion. Pending.

7. NationsBank Corp.-BankAmerica Corp. $63.3 billion. Completed Sept. 30.

8. The Travelers Group-Citicorp. $55.4 billion. Completed Oct. 8.

9. Sandoz AG-Ciba-Geigy AG $53.7 billion. Completed Dec. 23, 1996.

10. Daimler-Benz AG-Chrysler Corp. $51.5 billion. Completed Nov. 12.

SOURCE: BLOOMBERG FINANCIAL SERVICES

The Gas Price Plunge

It has been a nasty fall in Vancouver. Rainstorms have felled trees and power lines; the skies are persistently gloomy; the economy is in a slump; and the Canucks hockey team seems to have seasonal affective disorder, losing much more than winning. One of the few bright spots has been at the fuel pump: a Lower Mainland gas war has ensured that Vancouverites are paying some of the lowest prices in Canada to run their cars. Prices plummeted at one point to just over 30 cents a litre for regular gasoline in some areas, and it could still be found last week at 36.9 cents. The average charge, now 46.5 cents, was 55.3 cents a year ago.

One of the reasons for the lower price is the arrival of Los Angeles-based Atlantic Richfield Co. into the Vancouver market. Last May, Arco, as it is known, bought 52 Super-Save Gas stations in the Lower Mainland and pushed down the price of gasoline to woo consumers. "Arco has certainly stirred up the pot," says Andrew Assad, a staff member at MJ Ervin & Associates, a Calgary company that tracks gas prices. When Arco moved to slash prices, other retailers followed, and prices fell as low as 30.9 cents per litre in early November. "The tax in Vancouver is 29 cents a litre, so when we were selling gas at 30.9 cents we were not even coming close to covering our costs," says Petro-Canada senior analyst Laurie Stretch, who concedes her company has lost big money in the war. "It's great for consumers but it's been a real headache for us." But Vancouver is not the only city enjoying lower prices. And it's not merely because of competition among retailers.

The Canadian average price at the pump is 50.6 cents a litre for regular, the lowest in nearly four years, according to MJ Ervin findings. The reason is the continuing drop in the price of crude oil, which makes up at least one-quarter of the cost of gas. "We certainly seem to be in a period of lower raw material costs and greater retail efficiencies," says Brendan Hawley, vice-president of public affairs at the Canadian Petroleum Products Institute.

But Neil Symington, a senior associate at MJ Ervin, cautions that Canadians still are not getting the same break American drivers are, despite similar costs of refining. "Over 50 per cent of the price of gas is due to taxes," he says. "Take away the taxes and we would pay even less than they do in the U.S." Gas prices in August averaged 41.6 cents per litre in the United States, compared with 51.3 cents in Canada. The average U.S. tax bite was 16.8 cents, versus Canada's 28.5 cents.

Still, Canadian drivers welcome lower pump charges, particularly in big cities where the cost is always volatile. "Consumers have been irritated by the constant oscillation in prices," says Peter Dyne, chairman of the energy network of the Consumer's Association of Canada. The trick is to enjoy the lows while they last.

Maclean's December 14, 1998