The oil industry has seen several huge mergers the past years. These developments are crucial in streamlining the industry and maintaining the distribution of oil supply. Mergers are critical because it allows struggling firms to recovers and continue to operate. In addition, such corporate event provides companies opportunities to expand their operations in other regions. The merger being proposed by BP to its investors is a common instance in the industry. It is presented as a strategy that will allow BP to compete with the bigwigs of the industry. Moreover, BP is in the position to cover the markets being controlled by Amoco in the United States.
The management presented the problem by providing a lucrative option. It is a style that posits optimism. BP CEO Sir John Browne was clever in showing the investors the right approach to solve their financial necessities. The strategy of Browne was to make a merger more appealing. Instead of focusing on the possible problems, Browne showed the benefits of such event. A merger according to Browne is a necessity for BP to grow. The growth as viewed by Browne pertains to the expansion of operations and possible increase in oil production and exploration.
Another part of Browne presentation that is noticeable is the supposed reorganization that will happen to BP. Browne deviated from the negative aspect of restructuring and presented the positive effects of such strategy. It was mentioned that BP will save at least $2 billion. More important, Browne stated that BP is on the verge of upping its efficiency level. This means that resources will be optimized and wastes will be reduced.
It is evident that Browne was effective by presenting the solution as the problems. As expected, critics and analysts pointed arguments contradicting Browne’s claims. Accordingly, such transaction can become costly in the long run and create differences in views. For instance, Amoco has stated that their understanding of the foreign oil markets is weak. In addition, cultural differences will hinder the rapport that is needed in mergers. Browne was indeed successful in creating a positive picture in what was perceived as an unpredictable event. Posing the problems directly can possibly make the situation straightforward. But for Browne, using the solution as the problem will make the deal move forward.
The criteria for determining sound mergers range from company fundamentals to market opportunities. Some analysts also consider the presence of threats and internal weaknesses from the companies planning to merge. Company fundamentals are considered as the most vital criterion in making investment decisions. Investors usually study the company that is being merged. In this situation, Amoco has to be evaluated from its financial capabilities to its future contributions. The details provided by company fundamentals will allow investors to gauge the possible directions the merging companies will take.
Another basic criterion normally studied by investors is the savings. As Browne commented, such transaction will provide sufficient tax savings for BP. Savings from mergers is critical in influencing decisions. For investors, savings while expanding is a good bargain. Instead of settling for their usual investments, investors can recover some of the tax spent for its earnings. This is a situation where investors have more gains than sacrifices.
Mergers are being doubted because some companies agree on such arrangement to avoid its debts. Some companies also agree to merge to push the burden to its new partner. For investors, it is important to evaluate the debts of the company that it plans to merge with. Aside from debts, investors have to determine the extent of liabilities in the balance sheet of the merging company. It is hard to convince investors to shoulder the debts of a company for the sake of the merger. The most common strategy to avoid such problem is to perform restructuring. As discussed earlier, Browne stated in the presentation that reorganization is a necessity.
Finally, outside threats are part of the overall criteria being used by investors to assess the value of the merger. There are several external threats that can hamper such transaction. Political threats are the most common. Several oil producing states have started nationalizing their oil supply. This translates to commercial oil firms barred from making explorations. The unending economic uncertainties are also possible threats. Because markets are unpredictable, having consistent returns from investment is also a difficult task especially for oil companies.
It is undeniable that Browne made a good presentation of the problem. At the same time, Browne was able to capture the attention of the investors by presenting facts and numbers. The strategy of Browne was designed to make the event positive. This was done despite analysts doubting the feasibility of Browne’s projects. In making a decision it is best for investors to focus of company fundamentals and other valuable aspects.