Introduction
Whenever there is need to increase and control the market share, cut costs, expand distribution and benefit from the best global practices, many companies turn into mergers and acquisitions. Mergers and acquisitions when used in business terms refer to the aspects of financial dealings and market strategies in which one tries to increase the market power by involving the others.
In contrast to acquisitions, which can take place through hostile takeover for example by buying majority shares in a company, mergers occur in friendly situations where the involved management personnel cultivates due diligence process to ensure that the merger results in a success and the desired goals are achieved.
In most of oligopolistic mergers, big companies (with the intention of increasing their market share or power) joins and forms a bigger company. Though some mergers may resemble takeovers they always results in changes of names. Mergers can happen through cash payments where one company pays the other in order for them to join (or else through stock swaps).
When a market is dominated by a small number of large companies (suppliers) who controls the supply thus dictating the prices in the market, the market situation is said to be an oligopoly.
Classifications of Mergers
When companies decide to merge there are three ways in which this can be achieved. A horizontal merger, characterised by the union of two firms whose products are identical, becomes the first approach. The main aim of this type of merger is to increase the market share by penetrating untouched markets which is made possible by the other company.
The second type of merger is the vertical merger which involves two companies working in different stages of a product development joining and producing the same product which meets wider consumer tastes and demands. In most cases the organizations which merge vertically are owned by one person or organization that completes the hierarchy. Last type of merger is the conglomerate merger that occurs when two firms operating in different fields combine to diverse the products and increase the market share of each.
The Oil Industry in the US
In the past, there has been assertion that the organization of the oil producing and exporting countries (OPEC) is a cartel whose main aim is to control oil production in the world and thus dictating the prices in which the commodity is usually sold in the market.
Whether this is true or false is a question for another day but the same way the organization behaves so has of late been the same behaviour by large oil companies in the United States who have merged and formed cartels which control the supply of oil and its products in the American economy.
What many of these companies fail to notice is that whenever the cost of crude oil rises the consumer purchasing power is reduced; while billions of dollars are gained by oil companies the American economy suffers as there is reducing spending in other sectors. Like any other country in the world, when the United States of America is faced with such situation it tries to protect its citizens by increasing the quantity of oil in the market.
However, with the responsibility of distributing oil being subject to oil companies most of the time this it is not possible since the companies supplies the market with what they want thus driving the oil prices high. This results in oil companies earning higher than usual profits. How the profits gained are allocated depends with the company though most people think the profits should be ploughed back to the industry to ensure the companies can have enough capital to maintain the product flow in the market.
The US oil industry did not begin until 1859 when America dug its first oil well. The industry did not just stop there, it has been growing since. The available statistics reveal that at present, U.S is the third biggest oil producer in the world however it consumes more than any other nation in the world. Thus, with the demand of oil products being such high, there is a major purpose to find ways of fulfilling the demands of such a big market.
In any economic situation, when the market is large and the players are few there follows the establishment of different institutions that try to govern the way the market behaves. Whether monopolies or oligopolies. United States of America being a world economic power, there are little chances of creation of monopolies but several big oil companies have of late joined and created mergers in a bid to increase and control a larger market share.
While it is not advisable to allow a few market players in such a big market, the United States of America has allowed large oil companies to merge reducing the chances of a fair competition thus increasing chances of cartel formations. Cartels are formed when companies agree whether tacit or overt to control the supply of a commodity in the market with the main aim being for prices to rise resulting in an easier way of making profits for these companies.
The markets with the largest share of the market in the oil industry are all as a result of mergers and they include ExxonMobil, ChevronTexaco, and ConocoPhillips among others (Claybrook, 2004). It should therefore be no great wonder why the oil companies are among the most successful industries in United States.
The Pros and Cons of Mergers
The proponents of mergers argue that mergers add shareholder values by the creation of economies of scale. The advantages of Economies of Scale result whenever a company produces in large scale using few variable companies compared to a smaller company which produces the same products at the same fixed costs but at higher variable costs thus bringing the advantage to the shareholders but what many fail to notice is that instead of the mergers resulting in decreased oil prices their main aim is to increase their market share and thus control the market behaviour.
As have been noticed though mergers result in higher profits to those who have invested in the companies very little is gained by consumers when mergers are formed.
Mergers are also known to create synergy among the joining firms thus creating better use of the resources that complete each other. This reduces the expenses involved thus increasing the earnings and gives the risk averse investors more confidence in investing in the merged company. The only problem is that the aim of mergers in the oil industry seem to be driven by the desire to earn more profits
When big companies within any economy merge, they are mainly driven by the urge of increasing the market power and consolidate the industry among the few players by trying to edge out the other competitive industrial players. Mergers in the oil industry have resulted in some practicing anticompetitive practices such as undermining effective competition in the markets by reducing the number of market players and using coercion mechanisms to eliminate them.
The US oil companies are simply driven by the greedy urge of earning higher profits to the expense of most Americans. All these problems should however be blamed on the Federal Trade Commission which has allowed all these mergers in such a big market (Slocum, 2007). Others who oppose formation of mergers argue that mergers do not always result in success.
The net loss of value that may be brought about by monopoly or technology incompatibility is one of the major failures of mergers and the resultant elimination of smaller industry players also results in loss of job. For a merger to be successful it must increase the shareholders value faster than when the company was separate and it must also not interfere with the activities of the minor players,
The American Oil Industry and the Impacts of the Mergers
America is the third largest oil producer in the world producing more than several big Asian producing countries combined but its consumption is more alarming with statistics showing that the US consumes one per every four barrels of oil produced in the world. This forces the country to import about two thirds of the oil and gasoline used in the country. It is a fact that US uses more than what China, Japan, India, Germany and Russia use combined.
With sixty percent of the oil being used as fuel and another 9% being used for home heating, America citizens are a big market for any oil company that would want to invest there. This desire to provide and control what American citizen uses has resulted in more than 2000 mergers being approved in the oil industry since 1990.
The last few years has seen mergers between big oil producing and manufacturing companies such as Exxon and Mobil, chevron and Texaco and Conoco and Phillips which has resulted in very few companies controlling a very huge market share in the United States. The market share of the big five oil companies have increased as shown by Claybrook
“In the year 1993, the five largest oil companies in the country controlled 33% market share and the largest 10 having 55.6% in the year 2005 this had increased to 88 and 81.4% respectively”. (pg2)
This has ultimately led to the high profit margins in the country among the oil companies. With the US Federal Trade Commission laxity over its regulatory role and the Anti Trust laws of the country being weak, this has allowed these mega companies to merge and form partnerships which do not observe the perfect market rules and will use any strategy to loot more from the American citizens.
Most of Americans are complaining that the mergers have resulted in them paying more money at the pump price than they would be paying if the mergers were not allowed, since the market suppliers would be many ensuring fair competition which would drive the prices down.
The high oil prices affect the American economy in a negative way in that due to the large oil imports, the American trade deficit slugs the American economy growth, increases inflation in the country, and also creates financial hardships both to the American individuals and businesses entities.
Another negative impact of the mergers has been that oil companies in the United States have been colluding and withholding stocks so as to increase prices of oil products. This is after the US Federal Trade Commission in a 2001 report concluded that oil companies in bid to raise their profits withheld gasoline supplies and the action cost Americans billions of shillings while the companies were smiling on their way to banks.
The threat of America oil drying up has also led to these oil companies increasing oil prices. In that as the administration tried to fill the Strategic Petroleum Reserve by drawing 100,000 barrels of oil per day from the national grid, the oil companies were taking advantage to induce an oil supply shortage which resulted in the hiking of prices. While this was aimed at protecting Americans from external market supply shocks it reduced the supplies available thus forcing the prices to increase (Claybrook, 2004).
Mergers have also resulted in the big companies literally exploiting the fact that USis a major oil consumer by reducing refinery capacity through forcing other smaller industry players shut down and move out of the market. As noted by Claybrook (2004), “From 1995-2002, 97% of the more than 920,000 barrels of oil per day of capacity that have been shut down were owned and operated by smaller independent refiners”(pg 5).
If these smaller independent refineries had not been eliminated it would have been hard for the big companies to manipulate the markets prices at will because there would be alternatives.
Mergers Concentrate The U.S. Oil Refinery Industry: Changes In Control Of Market Share 1993 To 2003.
Source: Clay brook, 2004. pg 12 Mergers, Manipulation and Mirages: How Oil
Companies Keep Gasoline Prices high, and why the Energy Bill Doesn’t Help
The table above shows how the market share increased over a period of 10 years. With the top 5 companies controlling more than half the market share this gave them the incentive to exploit the consumers more and with the increasing number of mergers Americans are in for more problems unless their government enacts legislations which will discourage the formation of mergers. As we have noted the companies greed for higher profits will always force bigger companies to merge in order to control the market.
Conclusion and Recommendations
As the study above has shown, if any country not only America does not check the merging and controlling of markets by the big companies in the industry, the market will be controlled by few players and the common citizens are the ones who always end up suffering. Dominance of a market by few players results in formation of cartels which as we have evidenced reduces the supply of oil products in the American market thereby forcing prices to rise at alarming rates.
It was also evident that consolidation of assets within the oil industry coupled with weak regulatory laws in the United States has given big companies an opportunity to exploit American citizens and not only does this hurt the consumers pockets but also slows the economic growth of the Americans.
To reduce consumer exploitation by the oil companies, the government should make it illegal for any oil company to withhold oil stocks in the aim of creating supply shortages which leads to sky rocketing prices. The US government should also order the oil companies to increase their capacities and build stores where they can keep their oil products so as to ensure the supply and demand of oil within the country remain at stable conditions always.
The country should also reduce the oil consumption by introducing efficient oil product using machines and technologies which would save the country from the huge consumption she has or can in turn invest in other energy sources such as the solar and bio fuel.
The country can also increase the percentage of tax in profits gained as this would discourage the desire for many companies to earn abnormal profits and finally legislations which will make the regulatory authorities stronger are much needed in order to restore competition to the oil industry.
Reference List
Claybrook, Joan. 2004. Mergers, Manipulation and Mirages: How Oil Companies Keep Gasoline Prices High, and Why the Energy Bill Doesn’t Help, Public Citizen’s Energy Program Web. Available at: https://www.citizen.org/wp-content/uploads/oilmergers.pdf .
Slocum, Tyson. 2007. Oil Mergers, Manipulation and Mirages: How Eroding Legal Protections and Lax Regulatory Oversight Harm Consumers Web. Available at: https://www.ftc.gov/ .