ExxonMobil and Merger, Essay Example

ExxonMobil was created when two rivals Exxon Corp. and Mobil Corp. merged in late 1999 (CNN Money, 1999). This was an example of a horizontal merger since it was a merger between two companies in the same industry that were previously rivals and the goal was to achieve economies of scale, take advantage of synergies, and reduce intensity of competition in the industry (Investopedia).

Exxon and Mobil entered into merger because the crude prices were down and the two companies hoped that the merger will enable the new company to achieve lower production costs through economies of scale and ensure profitability. Exxon and Mobil were the two biggest players in the industry, thus, there was substantial room for greater production efficiency if the two joined their operations. Exxon and Mobil were also faced with greater competition abroad, thus, felt that the merger will result in a bigger company with greater resources that should result in improved competitiveness at the international level. The management of the two companies estimated that the merger will result in an annual savings of $2.8 billion and will also enable the newly formed company to trim its workforce by about 7.3 percent or 9,000 employees (CNN Money, 1999). Another benefit of the merger was that the newly formed company had greater capabilities and proprietary technologies to take advantage of oil exploration opportunities on global scale (Flanigan).

There are several trends already taking place that may affect the oil and gas industry in the near future if they are not already. First of all, the demand for cleaner substitutes may grow as the economics improves and producers of such technologies succeed in significantly bring down costs. Secondly, global warming continues to be a major issue in the global consumer and political arena and there may be demands for some sort of tax on energy companies. Third, advancements in exploration technologies may significantly increase oil production, putting downward pressure on the prices. In addition, greater competition from alternative energy sources may also put pressure on oil and gas companies to lower prices and opt for lower profit margins to maintain competitiveness.

Exxon and Mobil faced strict scrutiny at the time of their proposed merger and the possibility of any other horizontal merger to increase competitiveness is quite low due to legal and political hurdles. This is because ExxonMobil is already quite profitable and holds significant market share, thus, it will be very difficult if not impossible to pull off another merger or even an outright acquisition of a major competitor. Clean energy is the future and the growing popularity as well as improving economics of hybrid cars in less than a decade is a solid proof. ExxonMobil has been enjoying some of its best years, thus, it should start investing significant resources in alternative energy sources to create a potential future cash cow. The earlier the company starts, the more time it will have to build core competencies in alternative energy technologies.

References

CNN Money. (1999, November 30). Exxon-Mobil merger done. Retrieved June 22, 2013, from http://money.cnn.com/1999/11/30/deals/exxonmobil/

Flanigan, J. (n.d.). If Exxon, Mobil Merge, Would Biggest Be Best? Retrieved June 22, 2013, from http://articles.latimes.com/1998/nov/27/news/mn-48263

Investopedia. (n.d.). Horizontal Merger. Retrieved June 22, 2013, from http://www.investopedia.com/terms/h/horizontalmerger.asp