Exxon Corp. agreed Tuesday to acquire Mobil Corp. for $86.9 billion in stock and debt, creating the world's largest energy company and fortifying the new entity against a steep decline in oil prices, which has wreaked havoc on the petroleum industry.
"This is the deal of the century," said Fadel Gheit, a longtime oil analyst at Fahnestock & Co.The merger will allow the two oil giants to trim duplicate operations, reduce the combined worldwide staff of 123,000 by as much as 9,000 and achieve greater market share and economies of scale, the companies said. The new entity will also have the size to tackle any job, no matter how big, executives say.
Investors already had expressed approval, bidding up shares of both companies after news of negotiations on the largest U.S. merger surfaced last week. The euphoria subsided after the official announcement, however, as Exxon (XON), a component of the Dow Jones Industrial Average, fell 3 3/8 to 71 5/8. Mobil's stock (MOB), which traded around 75 before the Exxon rumors started, dipped 2 1/4 to 83 3/4.Under the deal, each Mobil share will be converted into 1.32015 Exxon shares. That values Mobil shares at about $99 each, foa total of $78.9 billion, based on Monday's closing prices. Mobil also was carrying $8.06 billion in debt at the end of the third quarter, including $3.96 billion in long-term liabilities. Exxon will assume that debt, a company spokesman said.
At Tuesday's prices, the stock portion of the deal would be worth $75.4 billion, reflecting the decline in Exxon shares. The total deal would then have a value of $83.5 billion. That number should fluctuate until the agreement closes, sometime by the "middle of next year," said Lee Raymond, Exxon's chairman and chief executive.
Exxon shareholders will own 70 percent of the combined company, which is to be renamed Exxon Mobil Corp. but retain both brand names. Raymond is to head the new company. His Mobil counterpart, Lucio Noto, is slated to become vice chairman of the board.
The companies, which began discussions in June, said the agreement should allow the new entity to save as much as $2.8 billion by the third year of the merger, with one-third of the savings coming in the first year.
The combination, pending regulatory approval, would represent the largest merger in U.S. history, and the merged company would surpass General Motors (GM) as the biggest U.S. company, ranked by sales. With annual sales of about $203 billion and a combined market capitalization of about $240 billion, it would outsize the world's biggest producer, Royal Dutch-Shell.
The merger could face antitrust hurdles. European officials say they will review the deal, and U.S. regulators likely will do so as well. Exxon and Mobil have been the most successful offspring of the Standard Oil Trust monopoly, which was broken up almost 90 years ago in the most famous U.S. antitrust case.
Still, though the new company might have to shed some minor operations, analysts said it will pass regulatory muster. Exxon Mobil Corp. will not hold more than a 25 percent market share in any part of the domestic oiindustry, where competition remains fierce, especially at the retail level.
Perhaps a bigger problem, some analysts have said, is whether the two companies and their disparate corporate cultures can coexist.
"Mobil has been known as a feisty and independent company since its inception," Adam Sieminski of BT Alex. Brown told clients. "Exxon, a conservative company with some of the most consistently high financial returns in the industry, has often taken the view that they don't need to get bigger through acquisitions."
Gheit, the Fahnestock oil analyst, said that will not be a problem. The strong-willed Raymond and Noto are among the smartest and most experienced hands in the energy sector, and the two will make the merger succeed, Gheit predicted.
"It will not only work, it will work beyond expectations," he said.
Irving, Texas-based Exxon, the second-largest global petroleum company, with a market value of about $177 billion, and Fairfax, Va.-based Mobil, the second-largest U.S. oil producer and fourth-largest worldwide, were driven into merger talks by persistently low oil prices, excess supply and intense competition.
Other oil companies have also sought out new combinations to gain an edge in a hostile environment. For example, British Petroleum (BP) in August said it would acquire Amoco Corp. (AN) in a $49 billion deal - after, some analysts said, failing to strike an agreement with Mobil. That deal is still pending. And Total SA of French on Tuesday agreed to acquire Belgium's PetroFina for $12.7 billion in stock.
With profits declining sharply, the primary way energy companies can boost earnings is through cost savings, analysts said.
"What counts is profits," Raymond said. "That's what this merger is about."
The urge to merge was given further impetus last week by the failure of an increasingly ineffectual OPEC to agree to further cuts in petroleum production, spurring heightened fears that prices could sink to $10 a barrel - or even lower.
This week in New York trading, oil futures contracts slipped below $11 a barrel, their lowest point since 1986. The U.S. Energy Department last week predicted that low prices would persist into the next decade amid weakened demand from Asia. Two years ago, oil prices rose as high as $21.
"If the [Organization of Petroleum Exporting Countries] cartel members fail to stick to production cutbacks agreed to last summer, the situation could take a turn for the worse. The key consideration now, as it has been in recent months, is the extent to which OPEC complies with the production cuts that have already been agreed on," Constantine D. Fliakos of Merrill Lynch told clients last week.
Exxon was advised on the deal by J.P. Morgan. Goldman Sachs advised Mobil.
Written By Jeffry Bartash