1.1 British Petroleum Company British Petroleum Company (BP) is a British multinational oil and gas company. It is the third-largest energy company and fourth- largest company in the world. It is vertically integrated and operates in all areas of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has renewable energy activities in biofuels and wind power. BP has operations in over 80 countries, produces around 3.4 million barrels of oil equivalent per day and has around 21,800 service stations worldwide. BP at a glance: History of BP BP's origins date back to the founding of the Anglo- Persian Oil Company in 1909, established as a subsidiary of Burmah Oil Company to exploit oil discoveries in Iran. In 1935, it became the Anglo-Iranian Oil Company and in 1954 British Petroleum. In 1959, the company expanded beyond the Middle East to Alaska and in 1965 it was the first company to strike oil in the North Sea. British Petroleum acquired majority control of 1 | Page Chapter-1 Company Profiles before Merger Industry Oil and gas Founded 1909 Type Public Limited Company Early Name Anglo-Persian Oil Company Headquarte rs London, United Kingdom Products Petroleum, Natural gas, Motor fuels, Aviation fuels
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1.1 British Petroleum Company
British Petroleum Company (BP) is a British multinational oil and gas company. It is the third-largest energy company and fourth-largest company in the world. It is vertically integrated and operates in all areas of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has renewable energy activities in biofuels and wind power. BP has operations in over 80 countries, produces around 3.4 million barrels of oil equivalent per day and has around 21,800 service stations worldwide.
BP at a glance:
History of BP
BP's origins date back to the founding of the Anglo-Persian Oil Company in 1909, established as a subsidiary of Burmah Oil Company to exploit oil discoveries in Iran. In 1935, it became the Anglo-Iranian Oil Company and in 1954 British Petroleum. In 1959, the company expanded beyond the Middle East to Alaska and in 1965 it was the first company to strike oil in the North Sea. British Petroleum acquired majority control of Standard Oil of Ohio in 1978. Formerly majority state-owned, the British government privatized the company in stages between 1979 and 1987. British Petroleum merged with Amoco in 1998.
1909 Anglo-Persian Oil Company Established as a subsidiary of Burmah Oil Company
1935 Anglo-Iranian Oil Company Renamed1954 British Petroleum Renamed1998 BP Amoco PLC Merged with Amoco
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Chapter-1Company Profiles before Merger
Industry Oil and gas
Founded 1909
Type Public Limited Company
Early Name Anglo-Persian Oil Company
Headquarters London, United Kingdom
Products Petroleum, Natural gas, Motor fuels, Aviation fuels
Costs and Expenses 91051 81605Profit before interest and tax 11013 10155Interest expense 1004 908Profit before tax 10009 9247Income taxes 2755 3066Profit after tax 7254 6181Distribution to shareholder 3008 3452
Retained profit 4246 2729Earnings per share (EPS)BasicDiluted
7.437.31
6.136.53
Dividends per share (DPS) - Cents 3.21 3.65
British Petroleum Company
Condensed Consolidated Statement of Financial Position
December31(Million $)
Assets 1997 1998Fixed assets 61601 65221Stocks and debtors 25134 19304Cash and liquid resources 1580 1422Total assets 88315 85947Creditors and provisions excluding finance debt
Amoco Corporation, originally Standard Oil Company (Indiana), was a global chemical and oil company that was founded in 1889 around a refinery located in Whiting, Indiana, United States. It later absorbed the American Oil Company, founded in Baltimore in 1910 and incorporated in 1922 by Louis Blaustein and his son Jacob. Amoco merged with BP in December 1998 forming BP Amoco, later renamed to BP.
Amoco Corporation at a glance:
Industry Oil
Founded 1889
Type Public Limited Company
Headquarters Amoco Building, Chicago, Illinois, U.S.
Products kerosene and gasoline
History of Amoco Corporation
Like most companies, Amoco started small. Unlike most companies, however, it had the backing of a big name in American industry, John D. Rockefeller.
Standard Oil of Indiana, as the company was officially known for many years, took shape in 1899. Initially it consisted of a single facility outside Whiting, Indiana, which refined oil intro products that people and business needed: axle grease for industrial machinery, paraffin wax for candles, and kerosene for home lighting.
The company grew. By the early 1900s it was the leading provider of kerosene and gasoline in the Midwest. Kerosene sales would eventually falter. But with car ownership booming across the United States, demand for gasoline would only go up and up.
The first Amoco service station opened in Minneapolis, Minnesota, in 1912. Those were heady days for the company. Rockefeller’s Standard Oil Trust had been broken up the previous year, meaning that Amoco had to stand on its own feet.
Two company scientists registered a patent for a process they had invented called thermal cracking. It doubled the amount of gasoline that could be made from a barrel of oil and also boosted the gasoline’s octane rating. The process became standard practice in the refining industry, and it was credited with averting a gasoline shortage during the First World War.
In the 1920s, the company decided to secure its own sources of crude oil. It established an exploration and production business, Stanolind, with plans to look for oil mainly in the United States. In 1930 Stanolind crews found what they were looking for, striking oil at a
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large field in east Texas in 1930 .They found the Hastings field south of Houston at the end of 1934.
During World War II, Amoco employees put much of their energy into providing gasoline and other products to the American military.
US warplanes flew on Amoco aviation fuel. Soldiers in the trenches peeled Amoco-made paraffin seals off their food rations at mealtimes. And Amoco researchers made discoveries that had military uses, including an all-weather motor oil for trucks and tanks and a new way of making TNT.
War diverted attention away from oil and gas exploration, but by the mid-1940s the company was back on the trail. Off the coast of Louisiana, Amoco explorers found the first oil out of sight of land. The following year, an exploration office opened in Canada. Its first oil was found within months.
Meanwhile, Amoco scientists made a breakthrough that would boost the amount of oil and natural gas that would flow through those new wells. They introduced Hydrafrac, a hydraulic well fracturing process that increased industry production worldwide.
A decade later, Amoco chemicals scientists discovered PTA, a chemical used in the production polyester fibers. To capitalize on the discovery the company opened Amoco Fabrics and Fibers.
As the 20th century progressed, so did Amoco. The company that had started as a single site in Indiana had become large by any measure.
By the end of the century, it was the largest natural gas producer in North America, with a reach that stretched well beyond its home continent: exploration in 20 countries, production in 14 countries. Amoco produced 13 million tonnes of chemicals a year and was the world’s largest producer of PTA. It was big in solar power, too, with a 50% stake in a leading solar company.
In 1998, Amoco and BP announced that they had merged, combining their worldwide operations into a single organization. Overnight, the new company, BP Amoco, became the largest producer of both oil and natural gas in the US.
1989 Established as Standard Oil Company (Indiana)1910 absorbed the American Oil Company1998 Amoco merged with BP
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Financial Statement before Merger
Amoco Company
Condensed Consolidated Statement of Income
Year Ended December 31,(millions of dollars)
Revenues: Sales and other operating revenues Consumer excise taxes Other incomeTotal revenues
Costs and Expenses:Purchased crude oil,natural gas, petroleum products and merchandiseOperating expensesPetroleum exploration expenses, including exploratory dry holesSelling and administrative expensesTaxes other than income taxesDepreciation, depletion, amortization, and retirements and abandonmentsInterest expense: Affiliates OtherTotal costs and expenses
Income before income taxesIncome taxesNet income
1997 1996
$28,4903,4511,045
32,986
15,973
4,468
5291,8234,141
2,043
509265
29,751
3,235961
$ 2,274
$28,6693,386
57432,629
16,067
4,091
5481,9154,129
1,986
49653
29,285
3,344942
$ 2,402
Summarized quarterly financial data for the years ended December 31, 1997
Condensed Consolidated Statement of Financial Position
December 31,(millions of dollars)
ASSETSCurrent Assets: Cash ................................... Marketable securities--at cost ......... Accounts and notes receivable Inventories ............................ Prepaid expenses, income taxes and other Total current assets .................
Investments and Other Assets: Affiliates ............................. Other ..................................
Properties Total assets .........................
LIABILITIES AND SHAREHOLDER'S EQUITYCurrent Liabilities: Current portion of long-term obligations Short-term obligations ................. Accounts payable ....................... Accrued liabilities .................... Taxes payable (including income taxes) . Total current liabilities ............
Deferred Credits and Other Non-Current Liabilities: Income taxes ........................... Other ..................................
Minority Interest ...................... Shareholder's Equity ................... Total liabilities and shareholder's equity
1997 1996
$ 78768
3,676876
1,0446,442
1,3912,9574,348
19,272$30,062
$ 146576
2,497872
1,0745,165
4,7392,791
807,610
2,7811,8824,663
11912,505
$30,062
$ 222767
3,899820653
6,361
1,4641,3762,840
20,007$29,208
$ 74442
2,663916831
4,926
4,7312,190
766,997
2,5921,9324,524
13112,630
$29,208
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2.0 HistoryOver a number of years, BP/Amoco had engaged in discussions about a joint venture involving their petrochemicals businesses. These exploratory discussions ended in February 1997 without an agreement. In May 1998, Sir John Browne, the Chief Executive of BP, met with H. Laurence Fuller of Amoco, to discuss other aspects of combining the businesses of the two companies. A month later, the financial advisors of the two companies, J.P. Morgan for BP and Morgan Stanley for Amoco, met to discuss aspects of a deal structure. A confidentiality agreement between the two companies was signed on July 24, 1998. On August 10, 1998, the two chief executives agreed on the exchange ratio and the composition of the new board. Later that day the merger was approved by the board of directors of each company. The next day, on August 11, 1998, the merger agreement was executed by the parties and the transaction was publicly announced. The merger was approved by the shareholders and became effective December 21, 1998.
2.1 Reasons behind Merger
To increase complementary strategic and geographical strengths which effectively
create a new super-major that can better serve our millions of customers worldwide.
The companies said they expect the merger to create an additional $2 billion in annual
pre-tax earnings through cost savings by the end of 2000.
To reduce the intensity of competition between two companies.
To adjust with the global price reduction of gas and oil
Concentration in the world oil industry
To adopt with Technological change
To use the opportunity of Globalization and freer trade
To decrease the Industry instability
To reduce Pressures for economies of scale, scope, and complementarities
a) Merger of Amoco into a newly formed BP first-tier US subsidiary
b) Amoco shareholders receive BP plc ordinary shares as ADRs
c) Unified global management team
d) US and UK GAAP results presented using merger accounting or on a "pooling of
interest" basis
e) US$-denominated group financials and dividends
f) Transaction recommended by both Boards
g) Effective: December 31, 1998
2.3 Exchange
Share prices 1 day before the merger announcement were $76 for BP and $41 for Amoco. Shares outstanding for BP were 976 million and 954.2 million for Amoco. The pre-merger total market values were, therefore, $74.2 billion for BP and $39.1 billion for Amoco, for a total of $113.3 billion. Thus, the BP market cap was 65.5 percent of the total.
The exchange terms were 0.66/share of BP for one share of Amoco. Thus, the post-merger number of shares remained the same for BP, but declined to 629.8 for Amoco. The new total number of shares became 1,605.8 million. The ownership shares of the BP shareholders became 60.8 percent versus 39.2 percent for Amoco. This shows that a stock-for-stock merger has a major impact on the relative ownership in the new firm. The terms of the deal are of critical importance for the real cost to the original owners of each firm.
Other aspects of the transaction are shown in Table 6. Their respective book values as of June 30, 1998 were $24 billion and $15.7 billion. The market-to-book ratio was 3.1 for BP and 2.5 for Amoco. The last 12 months' (LTM) net income for the two companies was about $4 billion for BP and about $2 billion for Amoco.
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2.4 Structure of post-merger UK Holding Company Structure Amoco shareholders exchanged their shares in Amoco for ADRs representing shares
in BP
3.5 Terms and Conditions
Accounting/reportingo Accounted for as a merger under UK GAAP (or "pooling" under US GAAP)o BP to report in US dollars, under UK GAAP with supplementary US GAAP
information provided
Dividendso Dividends to be declared in dollars, with a sterling alternative to be offered to all
UK shareholders of BP who require Sterling
Listing/indexo BP Amoco remains in the FTSE 100 indexo FTSE weighting increased
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3.1 Premium
The exchange terms were 0.66/share of BP for one share of Amoco. Thus, the post-merger number of shares remained the same for BP, but declined to 629.8 for Amoco. The new total number of shares became 1,605.8 million. The ownership shares of the BP shareholders became 60.8 percent versus 39.2 percent for Amoco.
3.2 Synergy
We can calculate synergy from and premium for merger by the following methods
a) Dividend Discount Model:
Amoco Corporation 1997
Net income after tax $ 2,402,000,000
No of outstanding Share 954200000
EPS 2.52
DPS 1.08
Retention Rate,1997=(1-Dividend Payout Ratio)
= {1-(DPS÷EPS)}
= {1-(1.08÷2.52)}
= 0.804
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Chapter-3Premium, Synergy, and Challenges of merger
Return On Equity,1997=(.10+.13+.14+.10+.12+.11+.11+.16+.15+.13+.09)÷11
=0.12
Growth Rate, G=Retention Rate × Return On Equity
= 0.804×0.12
= 0.0965
Required Rate of Return = 15.21%
P0=
D0(1+g )k−g
=1 .23 (1+0. 0965 )0 .1213−0 . 0965
=$47.75
So, the intrinsic value of Amocos’s share price is 19.68 under dividend discount model.
Value of Amoco = P0×Noof Shares
=47.75×954200000=45.56Billion
Value of BP
British Petroleum Corporation 1997
Net income after tax$ 7254000000
No of outstanding Share976000000
EPS7.43
DPS3.21
Retention Rate,1997=(1-Dividend Payout Ratio)
= {1-(DPS÷EPS)}
= {1-(3.21÷7.43)}
= 0.57
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Return On Equity,1997=(.10+.13+.14+.10+.12+.11+.11+.16+.15+.13+.09)÷11
=0.135
Growth Rate, G=Retention Rate × Return On Equity
= 0.57×0.135
= 0.0767
Required Rate of Return = 13.5%
P0=
D0(1+g )k−g
=3 .21 (1+0. 0767 )0 .135−0 .0767
=$47.15
So, the intrinsic value of BP’s share price is 19.68 under dividend discount model.
Value of Amoco = P0×Noof Shares
=47.75×9760 00000=4 6.02Billion
Combined Value of BP-Amoco =Value of Amoco + value of BP + Synergy
=45.56+46.02+(2/.123)
=107.84 billion
% of ownership of Amoco after merger=39.2%
Cost of Merger = Combined value × % of ownership
=107.84 × 39.2%
=42.27 billion
Economic Value Added (EVA) = Combined Value – Value of BP-Cost of Acquisition
=107.84 – 46.02 – 42.27
=$ 19.54 billion
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3.3 Financial Condition After merger
The foregoing dilution and accretion analysis assumes no synergies. However, in the proxy sent to shareholders of each of the companies dated October 30, 1998, some estimates of synergies are presented. It was stated that the combination of the two companies will achieve ``increased opportunities.'' The proxy statement also states that a cost savings of $2 billion per year would be achieved. The estimated cost savings, which are in addition to cost savings previously targeted by the two companies separately, are expected to come from staff reductions in areas of overlap, more focused exploration efforts, standardization and simplification of business processes, improved procurement and the elimination of duplicative facilities.
3.4 Estimated Synergy & its impact
We do not know the exact dollar value of synergy. We can represent projected dollar value of synergy and its impact on the EPS of both companies- Amoco and BP.
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3.5 Challenges of merger
As BP and Amoco prepared to merge, early decisions about future strategy, organization and products were necessary to satisfy future stakeholders:
• Employees requested certainty about the future of their jobs
• Suppliers required certainty about their future role
• Customers required delivery assurance
• Shareholders demanded economic growth
BP and Amoco shared a market space, but their operational and financial processes possessed inherent dissimilarities. Preparing to identify and analyze the common synergies between these two companies presented a large data collection, analysis and tracking problem. BP and Amoco needed to streamline their merger integration process and close the merger quickly.
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Conclusion
The BP/Amoco merger was the biggest horizontal merger in the oil and gas industry which affect the price of oil and gas globally.
The BP/Amoco merger has been described within the framework of the broader forces operating in the oil industry. Particularly, oil price instabilities and the continuing uncertainties of the industry are shown to have influenced management strategies and policies. Based on the evidence available to date, the BP/Amoco merger appears to have a valid basis in business economics and financial analysis.
By acquiring Amoco, BP has
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Bibliography
PersonMuhammad Salauddin Chowdhury, ACAAssistant Professor,Department of Finance,Faculty of Business Studies,University of Dhaka
