1. Introduction:
The forces of globalization and technological change have created a highly competitive and dynamic business world where mergers and acquisitions are increasingly being used to seek competitive advantage and maximize value for shareholders (Stanley Foster, et. all, 2007).
Corporate takeover activity, in other words which is the merger and acquisition (M&A) activity that has increased mainly since the mid of-1960s (Dimovski & Skerlavaj 2006). M&A has been, and likely always will be a main power in the modern financial and economic society. Almost every person in society is indirectly or directly affected by this activity, either by working for a firm that is involved in an M&A transaction, or by purchasing goods or services from it (Conrath, Craig, et. all, 1999).
1.1. Company Background:
Starting in 1908 with oil found in rugged part of Persia BP is among the largest private sector energy corporation in the world. It is a third largest global energy company headquarter in London United Kingdom.
BP provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. The company operates through two segments: Exploration and Production, and Refining and Marketing. The Exploration and Production segment engages in the oil and natural gas exploration, field development, and production; and marketing and trading of natural gas, including liquefied natural gas, and power and natural gas liquids (about BP at www.bp.com).
1.2. Brief outline of the problem:
On 20 April 2010, when drilling at the Macondo Prospect (United States) an explosion of the Deepwater Horizon, in which 11 people died, led to a largest offshore oil spill that contaminated a vast area of United States marine environment and continues to have a serious impact on wildlife, the local fishing industry, and regional tourism. This tragedy has severely depressed BP's stock price as well as its reputation and led to speculation about consequences such as a takeover of the company.
1.3. Approach and Methodology:
All the above will be achieved through desk research or secondary research, the use of recommended materials and lecture notes, internet and related industries.
Main report:
2. Takeover
The term takeover, which is also known as an acquisition, is the process of buying of one company (the 'target') by another company. A takeover in other sense is the acquisition of control of another company. This is normally done by buying more than 50 percent in shares of the company. An acquisition may be friendly or hostile and depends upon how it is communicated to Target Company's management, employees and shareholders and how it is received by them. If the firm being taken over does not welcome the bid, the takeover then referred to as "hostile takeover" and if the company seeks to resist the takeover, it is referred to as "contested takeover" (John Fred W, 2004).
Firms who are subject to takeover could become target for a number of reasons:
They have the potential for growth but do not have the funds to exploit their potential.
They have suffered some form of decline in fortunes but remain a widely known name in the market.
They have suffered a decline in profits and shareholder value and are not in a position to be able to fight off a takeover bid.
They are a firm in the process of growing and have reached a size whereby they are at a critical stage in development. The next phase to their growth may be critical and they may be reluctant to take such a massive step.
They may be seen as being a growing potential rival. (Bertoncelj and Kovac, 2007).
3. The process:
Takeover must not be considered as just an action, but it must be taken a process, which is probably the most significant thing in an acquisition deal because it influences the benefits and profitability of the acquisition (Sudarsanam, 2003). The process is same for both merger and acquisition and can be divided into some steps to ensure its profitability.
3.1. Preliminary assessment:
In the first step of M&A, the market value of the target company is measured. In this process not only the current financial performance of the company is examined but it also considers its estimated future market value. The intended company engages itself in a thorough analysis of the target company's business history. The products of the firm, its' capital requirement, organizational structure, brand value everything are reviewed strictly (Reed-Lajoux, 1998).
3.2. Phase of Proposal:
After assessing the market value of the company in the first step the next is to make a proposal for merger or acquisition. Generally, this proposal is given through issuing a non-binding offer document.
3.3. Exit Plan:
Exit plan is when a firm decides to buyout other firm (the target firm) and the target firm agrees, then the latter involves in Exit Planning. The target firm plans the right time for exit. Firm also considers the other alternatives options for instance, Full Sale, Partial Sale of assets, and others. It also does the tax planning and evaluates the options of reinvestment (Dimovski & Skerlavaj, 2006).
3.4. Structured Marketing:
After completing the Exit Plan, the target firm get itself involved in the marketing process and tries to achieve highest selling price. In this step, the target firm concentrates on structuring the business deal. (Dimovski & Skerlavaj, 2006).
3.5. Origination of Purchase Agreement:
The fifth step is the making of purchase agreement in case of an acquisition deal and the final agreement papers are generated in this stage.
3.6. Stage of Integration:
In the last stage the two firms are integrated through M&A process and ensuring that the new joint company will follow the same rules and regulations throughout the organization. (Bertoncelj & Kovac (2007)
4. Advantages and disadvantages of takeover:
The main reasons for which the companies enter into these kinds of deals are the principle benefits such as increased value generation, increase in cost efficiency, and increase in market share.
Following are the main benefits of Mergers and Acquisitions:
4.1. Greater Value Generation:
Mergers and acquisitions often lead to an increased value generation for the company. It is expected that after mergers or acquisitions the shareholder value of a firm would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale (Harding and Rouse, 2007).
4.2. Tax gains and revenue enhancement:
It also leads to tax gains and can even lead to a revenue enhancement through market share gain. Companies go for Mergers and Acquisition from the idea that, the joint company will be able to generate more value than the separate firms (Eric Armour, 2002). When a company buys out another, it expects that the newly generated shareholder value will be higher than the value of the sum of the shares of the two separate companies.
4.3. Mergers and Acquisitions:
If the company which is suffering from various problems in the market and is not able to overcome the difficulties, it can go for an acquisition deal. If a company, which has a strong market presence, buys out the weak firm, then a more competitive and cost efficient company can be generated. Here, the target company benefits as it gets out of the difficult situation and after being acquired by the large firm, the joint company accumulates larger market share. This is because of these benefits that the small and less powerful firms agree to be acquired by the large firms.
4.4. Gaining Cost Efficiency:
When two companies come together by merger or acquisition, the joint company benefits in terms of cost efficiency. A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets reduced. Murphy, C. (2002).
An increase in cost efficiency is affected through the procedure of mergers and acquisitions. This is because mergers and acquisitions lead to economies of scale. This in turn promotes cost efficiency. As the parent firms amalgamate to form a bigger new firm the scale of operations of the new firm increases. As output production rises there are chances that the cost per unit of production will come down (Murphy, C. (2002).
4.5. Some other Advantages:
Getting a business off the ground is often the hardest part. Guaranteed a head start makes it easier to work with. The main benefit of buying an existing business is the fact that all legal work has already been done. There is no need to file paperwork, obtain permits, and consult with lawyers (Reed-Lajoux, A, 1998).
Attracting customer towards a new business has turned into a fulltime job in itself. Buying an existing business also gives you the advantage of an established customer base. People already know the place, so this will minimize the costs of advertisement.
When buying an existing business one may get experienced employees that already working there and want to stay and work for the same company. This will allow business to employ their expertise rather than having to train new people for work (A. C. Fernando, 2009).
5. Some Disadvantages:
The existing business may bring some inherited problems with it. For instance the previous owner may have had trouble attracting customers, paying the lease, or running new campaigns. One will have to deal with everything to set things right before get to start moving forward.
5.1. Employees:
Impact of Mergers and Acquisitions on workers:
It is a well known fact that whenever there is a M&A, it will have some effects on the employees or the workers. In the case when a new resulting company is quite efficient in terms of business, it would require fewer numbers of people to perform the same job. Under this situation, the acquiring company would attempt to scale down the labour force. If the employees being laid off possess adequate knowledge and skills, they may in fact benefit from this and move on for better opportunities. (Eric Armour, 2002) But however, it is often seen that the employees who are laid off would not have played a considerable role under the new organizational set up. Consequently this leads to their removal from the new organizational set up. These employees in turn would look for re employment and may have to be offered with a much lesser pay package than the previous one. Though these circumstances may not lead to drastic unemployment levels, however, the employees or workers will have to compromise for the same. (A. C. Fernando, 2009).
5.2. Management at the top:
Impact of M&A on the top level management:
Impacts of M&A on top level management may in fact involve a "clash of the egos". There might be some differences in the cultures of the two organizations. Hence, under the new organizational set up managers may be asked to implement such policies or strategies, that may not be quite approved by him. When this situation arises, the key focus of the organization diverts and executives become busy in either settling disputes among themselves or moving on. However, if the managers are well equipped with knowledge or has sufficient qualification, then moving to another company may not be big issue for the managers at all (Eric Armour, 2002).
5.3. Shareholders:
The impact of M&A on company's shareholders:
Shareholders can further be categorized into two parts:
The Shareholders of the acquiring firm:
The shareholders of the target firm:
5.3.1. Shareholders of the acquired firm:
The shareholders of the acquired firm benefit the most. The reason behind this is, in most of the cases it is seen that the acquiring company usually pays a little excess than what it actually should. Unless a man starts living in a house he has recently bought, he will never be able to know its drawback. So, the shareholders forgo their shares, and the company has to offer an amount more than the actual price prevailing in the market. Buying a company at a higher price can actually prove to be beneficial for the local economy (Conrath, Craig, et. all, 2006).
5.3.2. Shareholders of the acquiring firm:
unlike the shareholders of the acquired company, they are most affected. If we measure the benefits enjoyed by the shareholders of the acquired company in degrees, the degree to which they were benefited, by the same degree, these shareholders are harmed. This can be attributed to debt load, which accompanies an acquisition.
6. TAKEOVER of BP:
BP was Britain's largest company with a stock market value of £121bn before the oil spill in the Gulf of Mexico. Since then more than £50bn of its share value has been wiped off and a number of potential bidders are believed to be circling to take advantage of its weakened state, of which the major companies are ExxonMobil, PetroChina, and Shell (John Donovan, 2010).
Potentially, these companies have their abilities to takeover BP, but probably some of them are unaware of the regulatory and political risk associated with BP (Nils Prately, 2010). BP has reported a record loss of $17bn (£11bn) over the damage caused by oil spill, fines, and compensation, having set aside $32bn to cover the costs of the spill.
According to an estimate by Fadel Gheit (managing director of oil and gas research), company's stock has sunk about 40% since the oil spill in the Deepwater Horizon, wiping out about $90 billion in market value. The company has already announced that it will not pay dividends and that it has cut capital spending. On the other hand, according to some industrial analyst, the company will probably have to sell off some of its sprawling assets to raise cash to pay for the oil spill, while trimming some of its less prized operations (John Donovan, 2010)).
BP's former chief executive, Tony Hayward, was well aware of the threat of a hostile bid and had held several meetings with potential friendly investors including the Kuwait Investment Office to make it harder for the likes of ExxonMobil or China's National Offshore Oil Company (CNOOC) to win control in a hostile takeover bid. The Kuwaitis already have a 1.75% stake, but BP would like it to increase that to as much as 10%.
With all those threats BP stands at the centre of fresh takeover speculation. Oil industry sources were quoted as saying that ExxonMobil had been given a green light by the US government to "take a look" at BP and that the U.S. government will not stand in its way if it chooses to attempt a takeover (James Moore, 2010).
7. Consequences of takeover
7.1. Creation of giant company
A merger between ExxonMobil is already the world's largest non-government owned oil firm, and if they merge with BP, it would create a group value at $400bn, creating a supergiant energy company that would control oil and gas fields around the planet. It would cause political raptures in both the U.S. and Britain. Britons could well fight hard to keep one of their flagship corporations from leaving the country (John Donovan, 2010).
7.2. Huge job loss
If BP merged with either ExxonMobil or Chevron, it would inevitably lead to huge job losses at a time of high unemployment. About 50,000 people were laid off after Exxon took over Mobil, and no politician will be willing to associate with this decision according to fadel Gheit. A merger will not only cause the unemployment but it will also affect the so many pensioners relying on BP dividends (Michael Corkery, 2010).
7.3. Inherited problems
BP is now carrying a significant legal and reputational risk which could create problems for BP's big oil rivals if they're considering a bid. Swallowing the risk whole is neither smart not an attractive prospect. For any company whether its ExxonMobil or Chevron, buying BP will bring all its problems. And it does not seem to add value for a profitable company to file for bankruptcy. Why would a company (ExxonMobil) that recently put its own spill behind it, buy somebody else's environmental disaster? (Elizabeth Souder, 2010).
7.4. A legal nightmare
Any takeover of BP would lead to a long, protracted antitrust review that could take months, if not years. That process would likely need to take place by regulators on both sides of the Atlantic. A 'Legal Nightmare,' explains Paul La Monica at CNN Money: "Why would any company want to inherit the massive legal headache associated with all the claims tied to the Gulf of Mexico spill? Sure, Exxon Mobil may be best equipped to deal with BP given that it was able to move on from the Valdez disaster in 1989 and is now the most valuable company in the U.S. But are BP's assets really worth the hassle?" Plus, one would have to imagine that the case for surrendering to a lowball takeover rests on the idea that BP's name is so tarnished it will never do successful business again in the US and will face permanently-higher financing costs (Paul La Monica, 2010).
7.5. BP is too expensive
BP, despite its huge market plunge, still is worth more than $100 billion. Presumably, BP's board and shareholders would want a big premium in order to accept a takeover bid. So BP would cost more than a pretty penny (Michael Corkery, 2010). The biggest problem with the takeover theory, at least today, is that it is hard to see why BP shareholders would wish to encourage the predators looking to buy the company on the cheap. The company's self-help remedies are still - just about - credible (Nils Prately, 2010).
8. Bright side of BP takeover
BP has lost its confidence in the market due to the disaster and seeking for a big investment in its share to lift market confidence.
8.1. Worth taking over
Despite so many risks, BP is still well worth taking over. Though it is a big loss to company which cost billions of dollars, however this cost is still recoverable if spread over five or ten years, which is likely (John Donovan, 2010).
Combination of two companies will be massive. At a time nearly 90 percent of the planet's crude is controlled by larger national energy groups including Saudi Aramco and Russia's Gazprom. If BP for instance, combines with shell, they would be able to control about 6% of the world's proven oil reserves. That kind of scale seems to be viewed as a positive factor in securing Western energy independence from potentially unfriendly oil-rich Governments (Elizabeth Souder, 2010).
8.2. Help to boost financial position
Since the oil spill disaster, company's stock has sunk about 40%, wiping out about $90 billion in market value. If two companies (BP and ExxonMobil) merge together they will create a group with a stock market value of $400bn (£265bn). This will help particularly BP to bolster its financial position in the market.
8.3. Expertise of rivals
For BP, the moment of make or break is fast approaching. Public anger with the oil company is rising rapidly and its short-term options for controlling the devastating leak are rapidly running out. The damage caused to environment is intensive and devastating to the livelihoods and lifestyles of the Gulf's residents. In this situation, surely, the Exxon Mobil may be best equipped to deal with BP problems given that it was able to move on from the Valdez disaster in 1989 and is now the most valuable company in the U.S. (Elizabeth Souder, 2010).
9. Conclusion and recommendation
It has been concluded from the above that many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power. However, M&A comes in all shapes and sizes, and therefore, investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
From the BP perspective, buying BP carries risks, despite all that, there have been rumours in recent days that BP's biggest rivals are circling the company for a possible takeover or merger, even as its public image is surely at one of the lowest points in its 102-year history. Both parties could have their own motives behind these kind of deals. Buyers and sellers should understand their specific motivations and goals as they pertain to the purchase under investigation. It is important that buyer and seller understand the perspective of the other party involved in the negotiation.
The oil major companies are facing a barrage of criticism from environmental and human rights campaigners, therefore there is need to change. And the change could happened if the world made a determined attempt to invest more heavily in renewable energy sources, but international initiatives take time.
