Managing Mergers, Acquisitions, And Strategic Alliances In The Energy Sector

Factors affecting decline in oil prices

Describe about the Managing Mergers Acquisitions and Strategic Alliancees.

The author in this report wants to highlight the scenario of the drop in price of oils in the energy sector during the period 2014-2016. The companies in the energy sector has faced a very difficult time during this period. The sudden drop in the prices of oils has adversely affected the profits earned by the company during this time and the spending of the company on different projects. Hence, the company had to maintain a balance between the short-term viability and the long term investments and objectives. Undergoing through these hard times, the oil companies all over the world had implemented different strategies to overcome the difficulties. These strategies helped the oil companies to improve and stabilise their positions by attaining new resources and technologies or by entering into new markets. Many companies in the energy sector have implemented the merger and acquisition strategy (WÄ…torek et al. 2016).

The Economists consider the drastic fall in the prices of oil all over the world over the period of the last two years to be one of the most significant developments in the world of macroeconomics. Statistics reveal that the prices of oil have fallen from a summit of $115 for each barrel in the month of June 2014 to under $35 towards the end of the month of February in 2016. Economists also stated that this sharp decline in the prices of oils is very similar to the situations in the year 1985 to 1986 when the members of OPEC had reversed the previous cuts of production. A similar situation also arose due to the financial crisis that occurred all over the globe back in 2008- 2009 (World Economic Forum 2016). It has become necessary for the economists to understand the underlying and deep-rooted causes that results in the drop in price of oils. Only then the economists can interpret the effects of the drop in price of oils.

Many studies on the reasons behind the drop in price of oils denote that the growth of some of the emerging markets across the world has declined. Many economists and scholars are of the view that this has resulted in the drop in prices of the commodities all over the world. The decline in prices of oils is much steeper than the decline in prices of other commodities like food products and metals. Economists suggests that the rise in supply of oil as well as the fall in demand for oil all over the world play important roles in bringing down the price of oil to a low level. Many governments of developing nations have taken full advantage of this scenario. The governments have reduced the subsidies on consumption of fuel. In this way the governments strengthen their fiscal policy (Weber et al. 2016).

Merger and Acquisition strategy

The above diagram depicts the scenario of the decline in prices of oils after the year 2014.In order to overcome the problem of falling prices of oil all across the world, the oil companies have undertaken different strategies to maintain a balance. The author in this report discusses on such strategy of merger and acquisition by citing examples from the present scenario.

The sudden decline in oil prices all over the world between 2014-2016 has become a cause of serious concern for the economists, the consumers and the oil suppliers of the world. Many people try to find out the underlying causes that affect the drop in oil prices. The economists are of the view that there are both internal and external factors that may be present in the economy to regulate the oil prices (Baumeister et al. 2016). The author in this report tries to throw light on some of these underlying factors.

Economist all over the world uniformly considers the Brent price of crude oil to be the proxy for the price of oils accepted globally. The crude oil’s Brent price was quiet stable for the past few years before 2014. There was a sudden dip in the prices of the crude oil, which led the market analysts, and economists of the world to think deeply into the matter. The drop in the prices of oil has put the oil producers across the world under severe pressure. Many people all over the world have raised questions about the sustainability and dependability of other alternative forms of production of energy. Many people fear that such steep decline in the oil prices may affect the political and economic stability of the countries that mainly survive on production of oils (Voxeu.org 2016).

Some market analysts and observers claim that the factors specific to the market for oil plated significant roles in causing the drop in the prices of oils. Some of the market experts suggest that the contributions of the positive shocks of oil supply after the year of 2014 are very high. The countries of Iraq, Libya and the United States have faced this kind of a situation in the recent past. The economists draw the attention of the people all over the world to the issues of the major shock to the expectation of oil prices (Kilian 2014). The shock occurred OPEC announced that it would try to keep the current production of oils at the same level despite the rise in production of oils in many other non-OPEC countries. OPEC announced this in late November of 2014 when the prices of oils had already began to drop.

The author wants to discuss some of the other factors affecting the prices of oil during 2014-2016. Some of these factors are as follows:

Economy of China: China is the country, which is the second largest oil consumer in the world. China surpassed United States in terms of import of liquid fluids in the year 2013. Most of the Economists of the world predict that the oil consumption of China would increase in the next few years. That would affect the prices of oil to a great extent.

Shale of America: United States produced more than 9 million barrels of oil in each day by the end of 2014. This value increased over 80% from the year 2007. The output of oil that the United States produced generated an excess amount of oil in the market. This resulted in fall in prices of the oil in 2014 (Hefner 2014). Studies reveal that the number of oil rigs in the country continues to reduce. The country has reduced the spending on oil but the output of oil has been stable so far. The ability of the country to maintain the output would affect the prices of oil.

Elasticity of demand: The higher demand for oil all over the world has resulted in the fall in prices of oil. In the year 2016, the gasoline prices in the U.S are below 2.40 dollars, which is more than 35% below the price in 2014. This has resulted in a rise in the consumption of gasoline.

Move of OPEC: Many economists consider OPEC’s move’s to be one of the important factors in bringing down the prices of oil in the period of 2014-2016. The crashing of oil prices demonstrates the influence of OPEC’s decisions on the changing prices of oils (Colgan 2014).

Geopolitical factors: a small disruption in the supply of oil would result in huge change in the prices of oil. The early 2014 witnessed violence in Libya that disturbed the exports of oil. This has affected the price of oil in that country. Some other countries like Iraq also faced similar situations. Hence, one can observe that the geopolitical disturbances are some of the most important factors that affect the prices of oil (OilPrice.com 2016).

During the crisis period of sudden drop in the prices of oil during the period of 2014 to 2016, the oil producing companies in the energy sector has resorted to different strategies to fight with the problem. The firms consider the merger and acquisition to be strategies of growth. By following the strategies of merger and acquisition, the companies can enter into new markets and can get access to new technologies (Cartwright and Cooper 2012). The companies resort to the strategies of merger and acquisitions by consolidating significant resources, physical and financial assets, tradable endowments and names of brands. The most thought about strategies of integration and merging includes the best practices of the organisations. Some of the root assets strategies comprises of retention of talent, cohesion of culture and collaborative leadership (Successful Acquisitions 2013).

The goals and aims of the oil firms in the mode of acquisition are to enter new markets, widening the base of customers, achieving cost and scale synergies. The author describes some of the golden rules that the oil companies follow as part of the strategies for successful acquisition and merger deal:

The oil companies first examine the market position of the target company with which they are going to make the merger and acquisition deal. This helps the oil company to choose the best target company. The company can also fix the deal of merger and acquisition at the most appropriate price.

The oil companies predict the future opportunities of the market, recent trends in the market and the reaction of the customers to the product of the target market. This would help the oil company to assess and estimate the potential of growth of the company.

After finalizing the deal of merger and acquisition, the company should start the process of integration well on time. When both the companies negotiate to make the deal of merger and acquisition, the management of both the companies needs to fix proper strategies of integration. This would ensure that both the companies do not face any unnecessary problems after the deal closes.

If the oil company plans to restructure the company with which it is making the deal, then the company should clearly explain the restructuring plan to the target company. The company should implement the restructuring policy at the time of making the deal so that both the companies can avoid any form of uncertainty.

It forms a very important part of the merger and acquisition strategy for the company to clearly understand the working conditions and environment of the target company before entering into the deal. The oil company should understand the work culture of the target company so that after the acquisition, the workers of the target company do no feel demoralized. The company should make the effort to keep the employees well informed and encourage them to work hard (Cartwright and Cooper 2014).

The author describes some of the examples of the merger and acquisition deals that occurred in 2014 to 2016. In the United States, the companies Noble, Exxon, WPX and Vangard has involved in an acquisition deal. Some other companies of different countries also made purchases in the international market. Some of these examples include Vedanta in India, Sequa in Norway (Serdar Dinc and Erel 2013). BP also showed interest in the Siberian Project. Schlumberger announced the acquisition of Cameron, which helped in the acquisition and merger activities of the service sector. Sun Edison is the sponsor of the two yield companies of the United States namely the TerraForm power and the other company is TerraForm Global (Pätäri et al. 2014).

Benefits

There are a large number of benefits associated with the merger and acquisition deals between the companies. The acquisitions and merger policies can generate efficiency of cost through scale economics. The merger and acquisition strategies can improve the revenue generated by the company through gain in the share of the company in the market. The merger and acquisition can generate gain in the taxes (Schmidt 2015). The author describes the main advantages of the merger and acquisition policies in the following discussion:

Higher value generation: The acquisitions and mergers often result in the increase in the generated value of the company. The managers and leaders of the company expect that the value of the shares of the company would increase after the acquisitions and mergers. This value would be greater than the total of the shareholder values of the main oil company (Phillips and Zhdanov 2013).

Acquisitions and mergers help in gaining taxes and can lead to enhance the revenue through gain in the market share. The company who enters into the deal of mergers and acquisition expects that the target company will generate higher values of the shares. The new shares would be higher than the total of the shares of the separate companies.

The mergers and acquisitions prove to be very beneficial to the companies that are going through tough phases in their business. If the company suffers from losses in the market, the company can resort to merger and acquisition deals. If the company has strong presence in the market then it can buy out a weaker firm. This deal would provide more competitiveness and cost efficiency. The target company gets the benefit as it can overcome the difficult situation it was facing in the market. It is due to some of these advantages that small and weaker firms agree to get into the merger and acquisition deals (World Finance 2016).

There are some challenges that the oil companies faces during the merger and acquisition programs. The author in this report describes some of the challenges faced by the organisations as follows:

Challenges in communication: Researchers and scholars have conducted survey on the companies that have entered into the acquisition and merger deals. The main findings of the survey reveal that the challenges in communication are one of the significant factors, which results in the failure of the merger and acquisition deals. Some of the fundamental aspects of integration include communication with the workers and empowering and motivating them. When the companies enter into the merger and acquisition deals, the employees of both higher and lower levels are kept in darkness and uncertainty (Galpin and Herndon 2014).

Challenges in retention of the employees: The merger and acquisition deals of many companies reveal issues in the retention of employees. Some employees feel negative attitudes at the time of merger and acquisitions. This results in a feeling of uncertainty regarding the future of the direction and path of the organisation, security of jobs and confusion about the job. This eventually results in the loss of faith and trust of the employees on the organisation (Stahl et al. 2013).

Cultural disadvantages: There are some cultural implications that can occur due to the merger and acquisition deals of the companies. Studies regarding the merger and acquisition deals highlight that nearly 30% of the acquisition and merger deals fail due to the differences in culture of the two organisations. When two companies engage in the merger and acquisition deals, there is a change in the practices and strategies of management. This sudden shift can have negative impacts on the workers of the organisation. The sudden change also disrupts the smooth flow of work in the companies (Impraise Blog 2016).

Conclusion

In the report, the author clearly depicts the strategies of the merger and acquisition deals between the oil companies. One can easily conclude that despite of all the drawbacks that are associated with the merger and acquisition deals, the deals provide great benefits to the merging companies. The merger and acquisition deals helped the oil companies during the crisis period of drop in oil prices during the years of 2014 to 2016 to gain back their positions. The oil companies gained back their market shares by employing the merger and acquisition deals during the period of drop in oil prices.

References:

Baumeister, C., Kilian, L. and Lee, T.K., 2016. Inside the crystal ball: New approaches to predicting the gasoline price at the pump. Journal of Applied Econometrics.

Cartwright, S. and Cooper, C.L., 2012. Managing Mergers Acquisitions and Strategic Alliances. Routledge.

Cartwright, S. and Cooper, C.L., 2014. Mergers and acquisitions: The human factor. Butterworth-Heinemann.

Colgan, J.D., 2014. The emperor has no clothes: The limits of OPEC in the global oil market. International Organization, 68(03), pp.599-632.

Galpin, T.J. and Herndon, M., 2014. The complete guide to mergers and acquisitions: Process tools to support M&A integration at every level. John Wiley & Sons.

Hefner III, R.A., 2014. United States of Gas: Why the Shale Revolution Could Have Happened Only in America, The. Foreign Aff., 93, p.9.

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Phillips, G.M. and Zhdanov, A., 2013. R&D and the Incentives from Merger and Acquisition Activity. Review of Financial Studies, 26(1), pp.34-78.

Schmidt, B., 2015. Costs and benefits of friendly boards during mergers and acquisitions. Journal of Financial Economics, 117(2), pp.424-447.

Serdar Dinc, I. and Erel, I., 2013. Economic nationalism in mergers and acquisitions. The Journal of Finance, 68(6), pp.2471-2514.

Stahl, G.K., Angwin, D.N., Very, P., Gomes, E., Weber, Y., Tarba, S.Y., Noorderhaven, N., Benyamini, H., Bouckenooghe, D., Chreim, S. and Durand, M., 2013. Sociocultural integration in mergers and acquisitions: Unresolved paradoxes and directions for future research. Thunderbird International Business Review, 55(4), pp.333-356.

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WÄ…torek, M., Drożdż, S. and OÅ›wiÄ™cimka, P., 2016. World Financial 2014-2016 Market Bubbles: Oil Negative-US Dollar Positive. arXiv preprint arXiv:1606.01218.

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