3 - A guide to Mergers & Acquisitions in the Oil & Gas Industry
Updated: Oct 26, 2018
In today's corporate world, companies struggle to grow as the market-place is rapidly evolving and competition is intensifying. Decades ago, growth meant increase in sales, market share, or company's valuation. In today's language, this is referred to as "organic growth". A new approach to growth is Mergers & Acquisitions (M&A), which became more and more an integral part of corporate strategy.
While M&A aim to stimulate and expedite growth, it is not challenge-free. It comes with a lot of restructuring cost. Also, most companies face The Merger Syndrome, a term that was first coined in the mid 80's to describe the negative consequences of the Merger & Acquisition on employees.
What is The difference between "A Merger" and "An Acquisition"?
Merger and Acquisition are used most of the time interchangeably (or jointly), while they remain two distinct terms.
Merger refers to a fusion between two entities (usually of equal size) to form a new one, this results in the abolition of the two former entities (which cease to exist), and the birth of a new and a larger entity (presumably healthier).
Acquisition on the other hand refers to an entity takeover of another entity (usually of a smaller size). While takeover gives the impression of a hostile transaction, we are using it to refer to the purchase of all shares and assets, and the taking of all debts and liabilities.
For the purpose of this article, we will use "Merger" to refer to both terms
Why Companies Choose Mergers & Acquisitions over Organic Growth?
Merger & Acquisition proves to be a fast and an easy way to grow a company (if done properly). The motive to complete a M&A transaction can vary from a company to another, but drivers are mostly:
to achieve economies of scale
to expedite market penetration (usually international markets)
to create synergy
to access new technology or intellectual capital
to liquidate and cash-out, usually performed by the smaller entity owners
What Types Of Mergers Do We Have?
There are 4 main types of Mergers:
Vertical merger occurs when a company takes-over another one in its supply chain (sometimes referred to as forward and backward integration). Suncor merger with Petro-Canada for $15.0 billion (2009) is an example of a downward integration, where Suncor gained control over its distribution channels (refineries and gas stations).
Horizontal merger occurs when two companies engaged in the same business activities decide to merge in order to grow in size and achieve economies of scale. We mostly observe this type of mergers at the Operators level. Exxon merger with Mobil for $ 73.7 billion (1998) and Total with Elf for $ 48.7 billion (1999) made each company grow significantly in size.
Concentric merger occurs when two companies similar in terms of distribution channels and target market merge in order to compliment their product-portfolio. It is mostly observed at the Oilfield-Services level. Schlumberger's $ 11.3 billion merger with Smith (2010), and $ 14.8 billion merger with Cameron (2016) are examples of such mergers. It resulted in strengthening Schlumberger's technology portfolio and value proposition.
Conglomerate merger is driven by a diversification strategy. It happens when a company decides to diversify its revenue stream by acquiring companies in different industries. GE acquisition of Baker Hughes valued at $ 7.4 billion (2017) is a great example of a conglomerate merger, where GE is also engaged in many other industries.
How M&A Success Is Measured?
Mergers success is usually measured by the scale and size the new entity, share price appreciation, or final transaction value. This measurement is short-sighted and lacks the metrics necessary to evaluate the real driver of the merger, which is Integration.
Issues such as integrating corporate cultures, business policies, and redefinition of roles are issues that might arise during the post-merger period. Therefore; the Human Factor remains central to M&A success, and needs to be monitored across a longer period of time in order to conclude the success (or failure) of the M&A.
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