Exxon Mobil

(Part 2)

 

Analisis de la Fusion

 

Exxon had better return on assets (6.75%) and return on equity (14.57%) ratios (Mobil’s were 3.95% and 9.01% correspondingly). This situation represented Exxon’s better efficiency at using investment funds (shareholder’s equity) to generate earnings growth. Exxon was more stable and effective in using its assets, while Mobil was more volatile and risky. During 1983–1999 Exxon was superior with the exception of 1989, when tanker Exxon Valdez disaster happened and cut profits of the company.

Companies had equal gross margin (38.7% vs. 38.52%), but Exxon had higher gross operating margin (7.9%) and profit margin (5.4%) ratios than Mobil (6.56% and 3.18% correspondingly) which means that Exxon was better in cost-cutting and controlling its expenses. But in some cases low operating expenses can damage long-term profitability and competitiveness of the company.

 

Exxon Mobil deal structure

 

5 days before the announcement Exxon shares price was $72 and 2,431 million shares outstanding ($175 billion market value) compared with $75.25 a share and 779.8 million shares outstanding for Mobil ($58.7 billion market value). With the exchange ratio 1.32015, Exxon paid 1,029.4 million its shares for Mobil or $74.1 billion. This was a $15.4 billion (26.2%) premium over Mobil’s market value or $94.9 a share. After the price run-up Exxon shareholders would own approximately 70% of the combined Exxon Mobil entity, while Mobil shareholders would own approximately 30%. The merger qualified as a tax-free reorganization in the US, and that it was accounted for on a “pooling of interests” basis.

In addition, the merger agreement provided for payment of termination fees of $1.5 billion. Exxon and Mobil also entered into an option agreement that granted Exxon the option to purchase up to 136.5 million shares (14.9%) of Mobil common stock at a strike price of $95.96. Exxon could exercise the option after the occurrence of an event, entitling Exxon to receive the termination fee payable by Mobil.

The termination fee and option were intended to make it more likely that the merger would be completed on the agreed terms and to discourage proposals for alternative business combinations. Among other effects, the option could prevent an alternative business combination with Mobil from being accounted for as a “pooling of interests”. Although companies introduced protection against hostile takeover, they didn’t use any collar to protect shareholders. J.P. Morgan & Co. and Davis, Polk & Wardwell advised Exxon, and Goldman Sachs & Co. and Skadden, Arps, Meagher & Flom advised Mobil.

 

Valuation

 

J.P. Morgan performed traditional P/E analysis. Such analysis indicated that Mobil had been trading at an 8% to 15% discount to Exxon. J.P. Morgan’s analysis indicated that if Mobil were to be valued at price to earnings multiples comparable to those of Exxon, there would be an enhancement of value to its shareholders of approximately $11 billion.

Goldman Sachs also reviewed and compared ratios and public market multiples relating to Mobil to following six publicly traded companies:

– British Petroleum Company plc,
– Chevron Corporation,
– Exxon,
– Royal Dutch Petroleum Company,
– Shell Transport & Trading Co. plc,
– Texaco Inc.

P/E multiple for these firms ranged 19.3–23.8. The analysis showed that Mobil was undervalued 5–16% relative to comparables with fair price $79–89 a share. It’s needed to notice that comparables analysis couldn’t capture the synergy effect, value creation and differences. Simple DCF analysis of Mobil as a standalone company gives range of intrinsic value of $59.8–79.5 billion or $76.7–102 per share depending on cash flow growth rate.

DCF analysis, based on the estimated pre-tax synergies of $2.8 billion expected to result from the merger, suggested a potential value creation in the short term of approximately $22–25 billion. J.P. Morgan’s review suggested that over the long term, the potential for value creation from these elements could be as much as $47–57 billion. So Mobil intrinsic value for this deal was $95–$118.8 a share depending on growth rate.

 

Summary of Exxon Mobil merger valuation

 

Since Exxon’s market capitalization was significantly larger than Mobil’s, Exxon’s shareholders would have enjoyed a greater proportion of the value creation if no premium were paid by Exxon in the merger. By offering a premium to Mobil’s shareholders, this potential value creation was instead shared in approximately equal proportions between the companies’ shareholders and such sharing was deemed to be a reasonable allocation of value creation. J.P. Morgan’s analysis showed that for transactions involving smaller companies with a relative market capitalization comparable to that of Mobil pre-announcement, a premium of 15% to 25% matched market precedent. In comparison, BP paid 35% premium for Amoco.

10 days before the completion of the merger, Exxon market value was $184.5 billion ($76 a share) and Mobil – $77.1 billion ($98.5 a share). Pro forma market value of merged company was $261.6 billion. Right after the merger was completed, the share price of combined Exxon-Mobil was $80.56 with 3,461.5 million shares outstanding, which gave $278.8 billion market value or $17.2 billion of additional value created. This figure would be even higher if we consider pre-announcement pro forma combined market value of $233.7 billion. In this case created value reaches $45.1 billion.

 

Synergy

 

The motivations for the Exxon-Mobil merger reflected the industry forces. Companies needed a secure presence in the regions with high potential for oil/gas discoveries and stronger position to make large investments. The benefits of the merger fell broadly in two categories: near-term operating synergies and capital productivity improvements.

Near-term operating synergies. $2.8 billion in annual pre-tax benefits from operating synergies (increases in production, sales and efficiency, decreases in unit costs and combining complementary operations). Management expected to realize the full benefits by the third year after the merger. During the first two years, the benefits should have been partly offset by one-time costs at $2 billion for business integration. The firms also planned to eliminate about 9,000 jobs. A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion.

Capital productivity improvements. Management also believed the combined company could use its capital more profitably than either company on its own. These improvements were realized due to efficiencies of scale, cost savings, and sharing of best management practices. The businesses and assets of Exxon and Mobil were highly complementary in key areas. In the exploration and production area, for example, Mobil’s and Exxon’s respective strengths in West Africa, the Caspian region, Russia, South America, and North America lined up well, with minimal overlap. The firms also had a presence in natural gas, with combined sales of about 14 bcfd. And Mobil contributed its LNG assets and experience to the venture.

There were technology synergies as well. In upstream, Exxon and Mobil owned proprietary technologies in the areas of: deepwater and arctic operations, heavy oil, gas-to-liquids processing, LNG, and high-strength steel. In downstream, their proprietary technology focused on refining and chemical catalysts. Exxon’s lube base stocks production fitted well with Mobil’s leadership in lubes marketing. Generally, the Exxon-Mobil deal was a move by the dominant partner to increase its asset base by 30% while raising capital productivity.

 

 

Exxon Mobil