Exxon, Mobil Acknowledge Merger Talks
Exxon Corp. and Mobil Corp., the nation’s No. 1 and No. 2 oil companies, confirmed Friday that they are discussing a merger, sending their stock and the shares of other oil companies higher on hopes that the pair will make it to the altar followed by many others in the price-shocked oil industry.
An Exxon-Mobil matchup, with combined 1997 revenue of $203.1 billion, would create the world’s largest publicly traded oil company, surpassing Royal Dutch/Shell Group, and it would zoom past General Motors Corp. as the largest U.S. company.
The potential deal would dwarf British Petroleum Co.’s $49-billion acquisition of Amoco Corp., now nearing completion. As with that merger, the combination of Exxon and Mobil would mark a family reunion of sorts for pieces of John D. Rockefeller’s storied Standard Oil monopoly, which was broken apart almost 90 years ago.
But such a behemoth transaction would certainly face regulatory scrutiny in the United States and Europe, although it probably would be completed eventually after the sale of some refining and marketing assets, analysts said.
If Exxon and Mobil do end up with a deal, the bright light of merger mania will certainly shine on the next tier of oil companies. They include San Francisco-based Chevron Corp., No. 3 among U.S. oil companies, and Los Angeles-based Atlantic Richfield Co., No. 7, which both have voiced their intention to remain independent.
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In a terse statement released early Friday, Irving, Texas-based Exxon and Fairfax, Va.-based Mobil said they “are in discussions concerning a possible combination transaction.”
“No definitive agreement has been reached. We cannot give any assurance that an agreement will be reached,” the statement said. The companies had no further comment on the talks, which were first reported in Thursday’s editions of the Financial Times. The newspaper, citing unnamed sources close to both companies, said Exxon and Mobil plan to hold a news conference Monday or Tuesday in New York.
Mobil’s stock jumped $7.63 to close at $86 on the New York Stock Exchange after trading as high as $87 per share.
Shares of Exxon rose $1.69 to close at $74.38, after reaching $77.31, also on the NYSE.
The sheer size of an Exxon-Mobil merger, analysts said, ensures that politicians will demand that antitrust regulators in the U.S. and Europe closely scrutinize the deal. But these analysts said regulators are likely to ultimately approve the combination and insist only that the firms divest a limited number of operations in specific markets where a merger would mean too much concentration.
Industry experts explained that even a combined Exxon-Mobil would be far too small to dictate the price of crude oil, which the powerful OPEC cartel itself can’t manage to control.
Oil is selling for about 30% less than it was a year ago, with gloomy prospects for a price uptick any time soon, given the stormy meeting of the Organization of Petroleum Exporting Countries that ended Thursday in Vienna, as representatives of the 11 member nations failed to agree on further production cuts.
“The oil exploration market is a worldwide market,” said Robert Litan, director of economic studies for the Brookings Institute think tank in Washington.
“Theoretically, the only party that had price control was OPEC, and that [clout] seems to have collapsed.”
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Despite the presence of private-sector giants such as Exxon and Mobil, their influence is limited because so much of the exploration business is conducted by foreign companies operating under government control, said Joseph Tovey, a New York-based investment banker who specializes in the oil industry.
At the same time, analysts said, there probably would be certain regions in the United States where Exxon and Mobil together would own too many retail service stations to escape a challenge by regulators.
By one estimate, the combined company would hold 20% to 22% of the U.S. retail gasoline market, with the share far higher in some markets.
In California, Exxon and Mobil together would rank third in gasoline sales with about 18.5% of the market, said Trilby Lundberg of Lundberg Survey Inc., a gasoline market research company in Camarillo.
“You could find parts of the country with [too much] overlap,” Litan said. Regulators will have to review the deal, he said, market by market.
Weak worldwide prices are one of the major forces behind the potential Exxon-Mobil deal and the BP-Amoco combination announced in August.
These latest oil deals are rattling the entire industry and are likely to produce new interest among acquisition-hungry companies in competitors such as Chevron, Arco and even the smaller California-based companies Unocal Corp. and Occidental Petroleum Corp.
“When BP and Amoco did their deal, everyone sat back and said, ‘Let’s review our position,’ ” said Jack N. Aydin, a New York-based oil industry analyst and managing director with McDonald & Co. Securities Inc.
With the disclosure of the Exxon-Mobil talks, he said, that analysis will intensify and “Chevron, Arco and Oxy will have to review their long-term strategies.”
Chevron, he said, might be strong enough to remain independent, but Arco “is more under the gun.” Analysts said Arco, while benefiting from its holdings in Alaska’s North Slope, has disappointed the financial community because it has stumbled at finding successful new areas for investment.
Aydin said a combined Exxon-Mobil could produce one-time savings in the range of $4 billion to $7 billion by cutting personnel in overlapping operations and reducing the overall budget for exploration, among other things. The two companies employ about 123,000 people in more than 140 countries, and some of them would surely lose their jobs in a merger.
Given the weak prices for crude and slumping earnings, analysts said, cutting costs is the only way for the oil giants to prosper. West Texas Intermediate crude, the U.S. benchmark, has been trading for less than $12 a barrel recently on the New York Mercantile Exchange, the lowest prices in more than a decade.
“If you can’t improve [profit] margins by improving prices,” Tovey said, “the only thing you can do is try to improve margins by cutting costs.”
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Potential Oil Partners
The two U.S. oil giants Exxon Corp. and Mobil Corp. confirmed Friday that they are involved in merger talks but that no definitive agreement had been reached. Combining the two companies would create a petroleum giant with a stock market value of about $237.5 billion, based on their current stock prices.
EXXON CORP.
* Headquarters: Irving, Texas
* Share price: $74.38
* Chief executive officer and president: Lee R. Raymond
* Fiscal year end: December
* 1997 sales: $137.2 billion
* 1997 earnings: $8.5 billion
* Employees: 80,000
* 1998 nine-month earnings: $4.9 billion
* Worldwide liquid reserves: 6.2 billion barrels
* Company description: The largest U.S. oil producer and the second-largest oil company in the world, behind Royal Dutch/Shell. Also produces and sells other petrochemicals, mines coal and other minerals. Operates or markets products in more than 100 countries.
MOBIL CORP.
* Headquarters: Fairfax, Va.
* Share price: $86
* Chief executive officer: Lucio A. Noto
* President: Eugene Renna
* Chief financial officer: Harold Cramer
* Fiscal year end: December
* 1997 sales: $65.9 billion
* 1997 earnings: $3.3 billion
* Employees: 42,700
* 1998 nine-month earnings: $1.9 billion
* Worldwide liquid reserves: 4.1 billion barrels
* Company description: The second-largest oil company in the U.S. and fourth-largest in the world. Mobil operates or markets products in more than 140 countries.
Sources: Reuters, Oil & Gas Journal, Bloomberg News
