December 14, 1998
Business

UNION OF GIANTS

Exxon and Mobil create a colossus

BY WARREN CARAGATA

On a chilly spring day in 1911, the decision reverberated through the executive offices of the Standard Oil Trust like a thunderclap: the world's biggest oil company was to be broken into 34 corporate pieces by order of the U.S. government. Upon hearing this, John D. Archbold, a hard-drinking associate of founder John D. Rockefeller, began to whistle. History does not record whether Archbold, noted for both his sense of humor and his relentless desire for profit, was whistling to break the tension or because he saw some secret joke in a development his colleagues found catastrophic. But if there is a Rockefeller heaven for the people who created one of the greatest industrial combinations of all time, Archbold would surely be whistling now--in amused delight. For what the U.S. government had split asunder in 1911, market forces in 1998 were joining back together. Two of the biggest pieces of the Rockefeller oil trust, Standard of New Jersey and Standard of New York--now known as Exxon Corp. and Mobil Corp.--had agreed to merge.

The course of 87 years has brought deeper changes to the companies than just their names. Both have developed worldwide scope and both have moved their headquarters, Exxon to the Dallas suburb of Irving and Mobil to the Washington satellite of Fairfax, Va. But Archbold and Rockefeller might appreciate the irony that part of the motivation for the $124.2-billion deal comes from the weakening power of the OPEC cartel and the related fall in oil prices. The very creation of the trust in the closing decades of the last century was based on Rockefeller's belief that producers of oil would never be able to muster the discipline to control prices for very long and that only powerful corporations such as his could bring order from price-cutting chaos. With crude prices now at their lowest in more than a decade, Exxon and Mobil hope the merger will produce cost savings of at least $4.2 billion a year. "The world has changed," said Mobil chairman Lucio Noto as the agreement was announced. "The easy things are behind us."

The deal creating the world's largest corporation will also bring together the Canadian offspring: Imperial Oil Ltd., controlled by Exxon, and Mobil Oil Canada Ltd., a wholly owned subsidiary of its U.S. parent. Imperial, based in Toronto, is Canada's oldest and biggest oil company with operations in all sectors of the industry; Calgary-based Mobil, with no refineries or gas stations, is the industry leader in offshore exploration and production on the East Coast.

The Exxon-Mobil marriage is just the latest in a hectic pace of corporate unions this year--in the oilpatch and other industries--as companies in Canada and around the world try to come to terms with the impact of globalization, the Asian economic crisis and frenetic technological change. Also last week, Total SA--the second-largest French oil company--announced plans to buy Belgian-owned PetroFina SA, making it the world's fourth-biggest oil company. As well, Germany's Deutsche Bank AG said it will acquire U.S.-based Bankers Trust New York Corp. for $15.5 billion, forming the world's biggest financial institution. "Entire industries are being restructured now," says Bill Macdonald, a former Imperial Oil director and president of W. A. Macdonald Associates Inc. of Toronto, which advises companies on strategic planning.

If it receives regulatory approval, the new company will be known as Exxon Mobil Corp., and, while many operational details are being sorted out, one thing is obvious: it will be big--very big. It will produce more crude oil than Kuwait. Combined revenues last year were $247 billion, about 40 per cent more than second-ranked Royal Dutch/Shell Group. It will have more than 46,000 gas stations and refine more oil than any other publicly traded company. The new entity will, officials said, have the corporate muscle to undertake huge projects in areas such as Russia and the ocean floor, and the financial strength to withstand low prices. The deal will be accomplished by a share swap, with no cash changing hands. Exxon shareholders will own about 70 per cent of the new firm.

In Canada, it will take time before the exact form of the merger will be known, according to officials of both companies. The Canadian end of the union is complicated by the fact that Exxon owns only 70 per cent of Imperial, enough for control but not enough to act without considering the interests of minority shareholders in the publicly traded company. "Imperial Oil is not a direct party to the agreement," said company spokesman Richard O'Farrell. "The implications for what the merger means to Imperial Oil are yet to be determined."

Under the most likely Canadian scenario, industry experts say, Imperial would buy Mobil's assets in Canada--but the price paid would have to respect the interests of all Imperial shareholders, not just Exxon. John Clarke, senior oil analyst at Deutsche Bank Securities Ltd. in Toronto, values Mobil's Canadian operations at about $4 billion. Leaving the Canadian assets in separate corporate hands would frustrate the goal of the U.S. parents to extract maximum profits by combining all operations worldwide.

Imperial Oil and Mobil Canada have operations that analysts think would work well together, with almost no duplication "The fit is very, very good," says Arne Nielsen, who helped build Mobil Canada and retired as president and CEO in 1990. He is now chairman of Shiningbank Energy Management Inc., a Calgary oil company. Imperial, formed in 1880 to fight the entry of U.S. companies into the Canadian market and bought by Standard Oil in 1899, is Canada's biggest oil producer, its biggest refiner, and has the country's largest network of 2,600 gas stations (their Esso brand name comes from Standard Oil's initials). It was Imperial that ushered in the Alberta oil boom with its Leduc discovery in 1947, but the company has recently shifted attention away from conventional sources in Western Canada to the oilsands in northern Alberta, including a 25-per-cent stake in Syncrude Canada Ltd., which produces more than 10 per cent of Canada's crude. Imperial is also a major producer of heavy oil.

Mobil's Canadian subsidiary, which started in 1940, operates solely in what the industry calls the upstream--the exploration and production of oil and natural gas, and has no refineries or gas stations. Most prominently, the company is the lead partner in the Hibernia oilfield on Newfoundland's Grand Banks and in the Sable Island gas project off Nova Scotia. "Mobil's principal strategy has been the East Coast," says Gordon Jaremko, editor of the trade magazine Oilweek in Calgary.

The areas where the two Canadian companies have overlapping operations are limited. That makes employees of the two firms happy. Internationally, about seven per cent of the combined Exxon-Mobil workforce of 123,000 could lose their jobs as the new company cuts costs. In Canada, Imperial has about 7,100 employees, Mobil 950. But given the lack of duplication, even the union representing about 500 Imperial employees isn't worried. "At the outset, we can't see any negative implications in Canada," says Rolf Nielsen, a vice-president of the Communications, Energy and Paperworkers Union of Canada in Edmonton.

Jaremko says one project that could be in jeopardy is Mobil's planned $1-billion Kearl oilsands operation in northern Alberta. With oil prices so low, "It's hard to be enthusiastic" about such a proposal, he says. And if Canadian assets are combined, Imperial could decide to get rid of less-productive oil and gas fields, says Deutsche Bank's Clarke. "They'll keep the best and shop the rest." Such an asset sale would please junior Canadian companies. Arne Nielsen for one, in his new role at Shiningbank, hopes some attractive properties come on the market as a result of the merger. "I think there will be assets available," he said.

Before the merger can happen, it will take months of planning--the companies do not expect to have details available until next spring--and regulatory approvals in Canada, the United States and other countries where the two companies operate. Canada's federal competition bureau will review the proposal and could co-operate with foreign antitrust authorities, says Michael Sullivan, the bureau's acting mergers chief. But observers expect few problems in Canada because Mobil does not compete in the sale and marketing of petroleum products. In addition, Clarke notes, the level of Canadian ownership in exploration and development will not be reduced because both companies are U.S.-owned. But in the United States and Europe, where both Exxon and Mobil are involved in retail gasoline sales, the merger is likely to raise more antitrust flags. Exxon is the largest U.S. oil company, Mobil is second largest. Under their agreement, Exxon has the right to pull out if competition agencies block the deal or try to force significant changes. The antitrust investigation in the United States could take a year.

The wave of corporate combinations in Canada has left the mergers branch of the competition bureau borrowing experts from other divisions as well as hiring new staff. The number of company marriages considered by the agency has more than doubled in four years, from 193 in the 1994-1995 fiscal year to about 500 expected this year, Sullivan says. Elsewhere, the merger wave is so powerful that all 10 of the largest mergers in history involving U.S. companies were announced this year, including such blue-chip icons as AT&T Corp. and Chrysler Corp. In the oilpatch, giant British Petroleum said in August that it had an agreement to buy U.S.-based Amoco Corp.--another vestige of the Standard Oil Trust--for $92.2 billion and smaller companies have followed suit. Against the trend, Royal Dutch/Shell Group and Texaco Inc. said last week they were calling off their proposed union of European refining and marketing operations, saying only that the deal "wouldn't maximize shareholder value."

The oil deals are driven by many factors, but none is as powerful as the falling price of crude, which closed at week's end at $10.92 (U.S.) a barrel. "A lot of this is being done out of a sense of weakness, not strength," says Clarke. "Costs have to be ripped out of the system." The pressures to do so are enormous. In the last year, the price of benchmark West Texas Intermediate crude has fallen 39 per cent. Adjusted for inflation, prices have not been lower since 1972. Members of OPEC met late last month in an attempt to put a floor under the slide but failed. With crude at about 50 cents a gallon in Canadian funds, bottled water now costs more. And as oil has fallen, so have prices at the gas pumps.

Companies in the oil industry and other sectors face what consultant Macdonald calls a new global crisis in which excess capacity and technological and other changes have turned the traditional business model on its head. Where prices could once be based on costs and passed on to consumers, companies must now increasingly slash their costs to meet falling price targets. "That's the world we're in," says Macdonald. John D. Rockefeller knew it well.