Corporate Takeovers and Petroleum-Industry Restructuring
Authors: Meister Paul M. , Cady Gilbert V. 
Published: December 2007

A controversy over the merits and methods of corporate takeovers has developed recently in the petroleum industry. The successful takeover or merger depends on the efficient use of available financing and careful management of employees.

The difficulty in assessing the value of a corporation and the undervaluation of oil-industry stock has enticed speculative buyers (raiders) into takeover attempts. The current tax code encourages takeovers while government legislation proposals attempt to eliminate wasteful ones. Defensive tactics used by corporate managements to discourage raiders raise questions about shareholder and employee rights.

Leveraged buyouts have encouraged takeover activity because cash is obtained easily through investor groups. Eight approaches to financing have been used consistently by industry. Six of these financing methods use cash that is raised from debt securities or loans. Financial direction in the oil industry is toward cost cutting, profitability, and wise investing. Finding oil is important, but a company must also remain competitive and increase its assets to survive.

A review of oil companies affected by the current merger activity indicates that those companies entering into merger agreements in the last 2 years have experienced asset gains, but they also have suffered revenue, income, budget, and stockholder equity losses.

Introduction

Since 1983, 50 domestic oil companies have expanded or disappeared because of mergers. Dwindling oil reserve bases result in undervaluation of oil firms because their value is based on their reserves. This is the prime reason speculative buyers, or corporate raiders, engage in takeover attempts. Falling crude prices, slack demand, and deflation have caused unprecedented financial and structural reordering. To remain competitive, these companies are selling unprofitable downstream assets and unloading nonoil subsidiaries in an effort to lower costs and streamline operations. The number of these takeovers has created a controversy over economic and social effects.

The takeover pros and cons can be categorized into four major concerns:how takeovers influence the economy;how they affect shareholders' rights;how they affect employees; andhow they determine the future supply of domestic oil.

The federal government is attempting to deal with all four concerns by enacting legislation to control takeovers.

Corporate managements use short-term defensive tactics to thwart hostile takeover attempts. The tactics are controversial because of their dubious benefits, high costs, and erosion of stockholders' rights. The methods only serve as diversions to a determined raider.

Leveraged buyouts can occur internally by management or externally by outside investors. The leveraged buyout allows the purchasers to use the purchased company's assets as collateral to reduce huge upfront cash requirements, thus making the takeover easier to finance.

The takeover threat and falling crude prices have caused U.S. oil companies to restructure and create more efficient upstream operations. If crude prices decline further, industry restructuring will increase as long as bankers continue to lend and the government does not interfere.

Merger Management

Merger management basics are aligned with those presented for corporate management by Peters and Waterman.1 The merger manager (see Appendix for definitions of terms) should consider carefully the following basic principles.Have a bias for action.Stay close to the customer.Stick to the knitting.Be productive through people.Get hands-on experience and be value-driven.Stay with a simple form and a lean staff.

Our objective is not to subordinate the remaining management criteria or autonomy and loose-tight properties, but we feel that these principles are important and are controlled by corporate pressure rather than by individual management functions. During a merger, a manager must carefully enforce Principles 1, 2, and 4 in regard to the purchased corporation. In addition, Meister2 recommends that these few basic principles are needed for a successful merger that will minimize turmoil and enhance employee morale:let employees know where they stand;adopt procedures to manage employee and program integration; andmotivate acquired company managers for merger success.

These views reinforce Principles 2 and 4 listed earlier1 as the most important merger management functions.