Index S.No. | Title | Page No. | 1 | Executive Summary | | 2 | Introduction Integrated Oil Industry OverviewDrivers of Merger | | 3 | Strategic Fit | | 4 | Valuation of Merger | | 5 | Valuation of Synergies | | 6 | Deal Structuring | | 7 | Effect on shareholders | | 8 | Factors leading to merger’s success | | 9 | Anti-Trust Concerns | | 10 | References | | 11 | Appendix | |

Executive Summary
The Exxon-Mobil merger of 1998 makes for an interesting Mergers & acquisitions discussion as one of the largest mergers in the history of Oil and Gas industry. The merger took place as the industry was undergoing a phase of rapid consolidation. Operational efficiency, oil reserves in emerging economies, constantly dipping oil prices and challenges in downstream operations were the defining factors of the landscape and drivers behind the merger.
The success of the merger lies in the significant synergies derived , whether it be complementary asset locations, different competencies and stronghold over different geographical locations. The near term operating synergy was a whopping $2.8 billion.
Risks however existed in terms of meeting anti-trust and regulatory concerns, retention of personnel and cultural differences. Exxon-Mobil post the merger would gain an exorbitant market share in key locations which would have a bearing on fair competition. This led to FTC handing out strict compliance requirements.
However, with intense efforts by the leadership at these two companies, the merger has gone down in history as one of the very successful ones. Exxon capitalized on the marketing expertise of Mobil while continuing its core competency in exploration. The valuation multiples indicated that the price paid for Mobil was much below its intrinsic valuation, though it had been acquired at a premium. The merger created a net synergy of $7 billion and gave way to strong dominance of Exxon-Mobil for years to come.

Introduction
As one of the largest mergers in the history of the oil industry, the acquisition of Mobil Corporation by Exxon Corporation was also the rejoining of two oil giants who were earlier a part of the same company, the Standard Oil Trust. At the same time with economies of scale playing a decisive role in providing significant operational efficiencies in the integrated oil operations industry and with major reserves being located outside of the US, in areas involving considerable risk, companies looked to gain advantageous synergies from mergers .
Integrated oil industry overview In the late 90’s oil prices experienced a consistent dip due to exponential increase in worldwide oil production, economic stress in areas such as Asia, overproduction by countries in order to generate foreign currency, etc. Also, downstream operations of refining and marketing were proving to be a significant challenge for oil majors as competition to be in the consideration set of suppliers for the frequently switching customers increased tremendously.
Drivers of Merger
Exxon, a global corporation, were a giant in the oil industry. It was the second largest in terms of oil and gas reserves. However, while downstream and petrochemical operations were doing decently well in 1997, the upstream operations were not performing to the same level. Mobil Corp. , also one of the largest oil companies in the world, looked to achieve accelerated growth. The merger presented a whole host of strategic benefits * Significant economies of scale to be achieved * Exxon was highly effective at cutting waste and streamlining its operations, but further enhancement of its operational efficiency was proving to be a challenge * Mobil’s strong research and development wing as Exxon as it had fallen behind in research and development related to upstream processes for extracting oil from lower-grade oil fields and downstream manufacturing of improved lubricants * The possible opening up of oil-rich locations such as Saudi Arabia to foreign players wherein Mobil had done substantial work

Strategic Fit
Exxon-Mobil merger was mainly driven by industry forces. These two companies had complementary assets in several locations, and by combining these complementary assets, Exxon-Mobil would have been in a stronger presence to work and invest in regions of the world with the highest potential for future oil and gas discoveries. The combined company was also able to invest in projects involving high risk and high return, where high outlay was required.

Exxon was experienced in deepwater exploration in West Africa and this combined with Mobil’s experience in production and exploration acreage in Nigeria and Equatorial Guinea resulted in huge cost savings. Similarly, in Caspian region, Exxon had strong presence in Azerbaijan and Mobil had similar position in Kazakhstan. Besides this in South America, Russia, and Eastern Canada complementary production and operational facilities existed.

The estimated near term operating synergy was found to be $2.8 billion. Two-thirds of the savings was a result of elimination of duplicate facilities and excess capacity, which resulted in reduction in general and administrative costs. By applying best business practices of each company across the globe, more cost saving was done.
Valuation of Merger
The merger was valued using 3 different techniques namely FCFF, APV and comparable companies. The Debt/Equity ratio is assumed to be constant for the firm. The comparable transaction valuation is dependent on sales and market capitalization data of peers. Valuation Method | Value of Mobil(in Billion dollars) | FCFF | 114.85 | APV | 111.80 | Comparable Transaction | 67.37 |

Exxon paid 24% premium over Mobil's pre-rumor stock price, still our analysis shows that the value of Mobil was higher than the $78 billion deal amount. This might be the reason of lawsuit by the shareholders of Mobil against the firm, as they received less than they were entitled to.
Valuation of Synergies
According to comparable valuation, the value for Mobil as an independent company lies in the range of $59 billion to $78 billion. Due to being a horizontal merger, there were expectations to obtain significant synergies between the two companies. These synergies may be obtained through combination of oil fields and reduction of duplicative administrative functions.
If we look at the immediate cash flow and balance sheet of combined entity (i.e. Exxon-Mobil) post-merger, we observe improvements in various financial parameters indicating the synergistic benefits obtained from merger. Let us assume the parameter ‘A’ for Exxon and ‘B’ for Mobil. Parameter | Exxon(A) | Mobil(B) | Exxon-Mobil(A+B) | Return on Asset | 0.0675*A | 0.0395*B | 0.1204*(A+B) | Return on Equity | 0.1457*A | 0.0901*B | 0.2633*(A+B) | Operating Margin | 0.0709*A | 0.0656*B | 0.121*(A+B) | Current Ratio | 0.91 | 0.67 | 1.06 | Asset Turnover | 1.25 | 1.24 | 1.58 | P/E | 23.6 | 20.1 | 16.2 | The increased return on asset post-merger can be explained by synergy obtained between the exploration and production expertise of Exxon and marketing expertise of Mobil. Exxon deliberately preserved Mobil famed winged-horse logo. This helped Exxon to capitalize on the brand reputation of Mobil while focusing on its core competency of exploration.
The increased operating margin post-merger is due to the economies of scale obtained in refining after combining the assets of both entities. Additionally, the removal of duplicative assets helped in minimizing the incurred cost.
As the deal involved transfer of shares only, each company maintained the previous cash reserve on its balance sheet. The improvement in operating margin improved the cash flows to the merged entity thereby improving the current ratio of combined firm.
P/E ratio of combined firm is less than that of independent firm pre-merger due to the price paid for Mobil is way below that obtained from the DCF valuation. This indicates that Exxon has paid far less price to obtain asset with superior earning potential.
Deal Structuring
Structuring was done keeping in mind leverage of Mobil’s brand equity. The combined company was to maintain separate brands and gasoline stations. Mobil’s famous winged-horse logo was to be continued. The market value of Exxon before the merger was $175 billion while Mobil’s was $58.7 billion. The P/E ratio for Exxon was 23.6 and that for Mobil was 17.9. The premium paid by Exxon over Mobil’s pre-rumor stock price was 24%. Exxon paid 1.32 shares for each share of Mobil.
The equity value of Exxon shares represented 75% of the combined market value before the merger. After the merger, the proportion for ownership had was 70% for Exxon and 30% for Mobil. The 19-seat board of the combined entity was to have only 6 Mobil representatives in accordance with the 70%-30% ratio mentioned above. 100% of Mobil’s issued and outstanding voting securities would be held by Exxon. | Dollar Amounts | Percentage | Pre-merger | Exxon | Mobil | Total | Exxon | Mobil | Share Price | $72 | $75.5 | | | | Shares Outstanding
(million) | 2431 | 780 | | | | Total market value
(billion) | $175 | $58.7 | $233.7 | 74.9% | 25.1% | Exchange Terms | 1.32 for 1 | | Post-merger | | No. of shares
(million) | 2431 | 1030 | 3461 | 70.2% | 29.8% |

Effect on shareholders

Figure: Stock price of ExxonMobil (Black Line)
The above figure shows a comparison between ExxonMobil stock price and S&P 500 stock exchange index and oil industry. As can be observed, the growth trend was lower than that of the market index from 1998 to 2004, typical of the initial stage of a merger. However, 2005 onwards ExxonMobil’s stock price rose in conjunction with the rise in oil prices. The growth rate for ExxonMobil was higher than the market index and also the expected growth rate for oil industries. This rise in stock prices is indicative of long-term growth.
Factors leading to merger’s success
Exxon-Mobil merger was one of the most successful mergers in the history. There were many reasons behind this success; the most important was the presence of complementary assets in many geographic locations. Because of the synergy created by these complementary assets and by eliminating duplicate capacity, the firm was able to create a synergy of $7 billion according to industry reports. The leadership from the top also played an important role in making the deal successful. As this merger was made possible due to the commitments of CEO of both companies, they tried their best to build a world class company. The combined company was able to increase its market share by 23 % by 2006 and retained its no. 1 position in oil and gas industry.

Anti –Trust Concerns
Exxon and Mobil were large companies competing in many products and geographies across the United States. Their merger would make Exxon-Mobil gain an overwhelmingly large market share in certain markets raising anti-competition concerns. Thus, the Federal Trade Commission insisted on extensive restructuring and divestiture prior to accepting the proposed merger. Major concerns were that the deal would significantly lessen competition in certain markets for refining and marketing of gasoline within the US and give rise to conditions wherein the merged entity could raise prices for consumers. To address these concerns, the FTC directed the companies to divest gas stations in heavily and medium concentrated markets to approved acquirers. Exxon and Mobil complied and decided to sell/reassign 1,740 stations in Mid-Atlantic States, 360 in California, 319 in Texas and 12 in GuamSale .Sale of certain refineries, Exxon and Mobil stores and assigning supply agreements for additional stores completed the meeting of raised concerns by FTC.

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References
* The Exxon-Mobil Merger: An Archetype, J. Fred Weston, Journal of Applied Finance, Financial Management Association, Feb 26 2002 * Success Story of Exxon Mobil, Abey Francis http://www.mbaknol.com/management-case-studies/case-study-success-story-of-exxon-mobil/ * FTC File No. 9910077 (n.d.). Exxon/Mobil - 11/30/99. Retrieved November 1999, from http://www.ftc.gov/opa/1999/11/exxonmobil.shtm * The Exxon-mobil Merger & Its Impact On The Energy Industry Analysis: The Exxon-mobil Merger & Its Impact On The Energy Industry : Michael Y. Wang - John S. Herold Inc | Round Table | AMZN, AOL, AXNT, BAANF, BMCS, CA, CPWR, CSCO, ILOGY, MSFT, NEON, PSFT, RWAN, SAP, VRTS, YHOO. (1998, December)

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