An Analysis of Merger & Acquisition Strategy
Introduction
There has been a major fall in the oil prices in past two years from 2014-2016. The decline in oil prices has led to a major impact on the energy sector making it difficult for energy producer companies to survive. However, despite the falling oil prices and damp prospects, there has been a major announcement of merger and acquisition that touched the $300 billion dollar mark in 2016, while the deal announcements in 2015 were in the tune of $3.2 trillion across the globe. Most of the surge in the energy sector is attributed to some of the mega-mergers like the merger of LP with Williams Cos. for an amount of $32. 6 billion and Schlumberger Ltd. Buying of its rival company Cameron International Corp. for an amount of $12.7 billion. Finally, the largest deal of the year 2015 had been a spending of $70 billion by Royal Dutch Shell TLC to buy its smaller competitor BG group TLC. These merger and acquisition activities continued in the energy sector despite the difficult time of oil price drop. The oil price drop in the period of 2014-2016 had gone up to almost 60%. The biggest deals in the energy sector gave out a strong message to the industry thereby maintaining the synergy of the industry. The merger and acquisition were not only a business deal but also a strategic move within the energy sector by the bigger companies to acquire their rival and outperform their peers. Tough times like these come as an opportunity in disguise for bigger companies (Mattioli & Cimilluca, 2015; The Economist, 2014). A major impact of the falling oil prices in the spending of organizations to conventional expenditure avenues. However, it is estimated that spending to unconventional avenues like Shale would increase. Even in current scenarios, the market share of Oil Shale in U.S. has increased to 93 million barrels a day worldwide. An impact of falling prices is a low production of oil impacting supply-demand of the oil industry. Oil exporters are more likely to be impacted by the shift in supply-demand than the oil importers (Arezki and Blanchard, 2015).
Purpose of Study
The purpose of the study is to analyse the strategy of the merger and acquisition deals in the energy sector during 2014-2016 oil price drop. The report attempts to analyse critically and identify the factors and strategies that were employed by various companies in that period.
Applied Academic Research Models
There are two research models applied to the critical analysis of merger and acquisition strategy in the energy sector during 2014-2016. The first is a SWOT (Strength Weakness Opportunities and Threats) analysis for internal and external factors over the mergers and acquisitions in the energy sector. The second model used is ANSOFF matrix for an analyses of the applied strategies for the mergers and acquisitions.
SWOT Analysis for Internal and External Factors
Internal Factors
Strengths
The internal factors responsible for taking a decision on the Merger and Acquisition depend upon the strengths and weaknesses of the organization. An M&A decision must be taken based on these two internal factors.
Organization Capabilities
Capability development comes as a major policy objective for most firms looking at aggressive expansion plans and enhanced portfolios. The first and foremost implementation strategy that gets proposed on the table is that of M&A options that the firm evaluated to buy a prospective organization to fill the gap (Fazli, 2016).
Resource Development
Resource development regarding available manpower, skilled resources, and available equipment is a major factor for most companies to look for options apart from spending reserved cash. Merger and Acquisition present such an opportunity to firms through they can enhance not only their capabilities in different areas but also gain valuable skilled resources which otherwise would have been costly for the firm to develop and that too overshadowed by unforeseen factors (Fazli, 2016).
Lower Risk and Increased Diversification
Most firms aspire for low risk with high returns. In the event of falling oil prices, the risk of acquiring a company is substantially reduced due to competitive prices and negotiable deals. Most companies could see growth and profits once the market stabilizes and oil prices start to increase. Diversification plans for organizations also lead to M&A decisions as it is better and safer to acquire a small company that is already established in a particular product or a specific market. Both the internal factors impact the stakeholders and executive decision makers to opt for the M&A route (Slaughter and Yee, 2016).
Weaknesses
Globalization and Market Enhancement
In the growing market conditions and increasing competition, it is important for each organization that plans at growth to participate in the global market scenario and venture into different markets across different regions. Such decision that was considered as beneficial for organizations are now a necessity. In the global turmoil, that affects different regions at various frames of time can be balanced by a systematic and proper global market development by a firm. The globalization goals of an organization are best achieved through M&A decisions and in such time as global oil price fall companies that could be acquired are not difficult to find (Slaughter and Yee, 2016).
Product Development Cost
In most of the cases, for any firm the cost involved in the development of any new product is very high. The product development could be a physical product or a process. The biggest problem with product development is the success of that product, testing market acceptance and understanding the revenue models. In such scenario, M&A route is an effective methodology where an existing product can be evaluated for past performance and prospects (KHARTUKOV, 2016).
External Factors
Opportunities
Falling Oil Prices
In the mid of 2014, the oil prices went down to its lowest levels in the past 4 years leading a market crisis in the energy sector. The ramifications of the oil price fall impacted every country and every company. The situation had been beneficial for consumer countries. However, economies that are oil producing or dependent on its trade suffered huge losses, leading to consolidation and devaluation of companies. The oil producer companies that depend on upon oil revenues face a destabilizing effect, low investor confidence and sometimes leading to bankruptcy and security crisis. In such a scenario where many companies face the challenge to rise or perish, some companies take the opportunity to expand their capabilities and portfolio. The industry event of falling oil prices also leads to the development of shale oil that many companies started to accept and trade. The drop in oil prices became a major factor that saw unprecedented growth in merger and acquisitions by bigger companies as they set out to take the opportunity to acquire smaller companies (Williams, Morley, Warga and Bronstein, 2015).
Threats
Global Market Conditions
Falling oil prices lead to catastrophic conditions for oil-dependent economies, it led to economic as well as political instability amongst those countries that were oil producing states and were heavily dependent on oil revenues (Williams, Morley, Warga and Bronstein, 2015). Such global market conditions led to many international organizations like Shell to take the merger and acquisition route that enabled them to not only expand their portfolio but also safeguard their interest by expanding into different and stable markets. The changing global market conditions are also impacted by some events like changed policy objects of OPEC (Organization of Petroleum Exporting Countries), increased production of Oil in U.S. and eventually a low demand due to slow economic growth in Europe and Asia. The changing global condition and new U.S. position as the largest producer of oil have led to new policies and expansion plans of oil producing and trading companies. The foremost step and effective policy employed by such companies are undertaking the M&A route. In present situations, it is also an important step for some companies to stay in the business (Gara, 2014; KARAMBU, 2016).
Ansoff Model for Strategic Planning and Growth Strategies
In tough times it is a natural desire for company management of larger companies to take the opportunity head-on and enable their growth through merger and acquisitions. A general market scenario in tough times is that bigger companies outperform their smaller peer companies. The elementary factor is that bigger companies plan for such upheavals of the market arising from natural and unnatural circumstances (Ochieng, et. al., 2016).
Market Penetration
Most of the big companies had backup plans and stacked up resources to not only sustain their existence but also look out for opportunities to acquire smaller companies that otherwise would cost heavy (Williams, Morley, Warga, and Bronstein, 2015). The strategy applied for M&A deals acts as a two-headed sword, where on the side the company acquires another company in competitive prices and terms to boosts its operations, and it also serves as a positive message to all stakeholders of the organization.
Market Development
The most effective strategy applied during the Merger and Acquisitions is the one that employs the firm’s strengths and ability to compete. Competitive advantage is an organization’s ability to outperform regarding throughput, productivity and long terms decisions where M&A play a major role in defining the firm’s long term sustainability (Berard, 2016).
Product Development
Product development comes with a risk of market acceptance of the new product and it takes time to reach break-even. Product development through M&A is a strategy where a company acquires another company for a new product instead of spending its precious cash reserves on the product development activities. The route of M&A enables a company to not only gauge the performance of an existing product but also anticipate the future prospects of that product (KHARTUKOV, 2016).
Diversification
Another strategy towards Merger and Acquisition is to look out for companies that would boost the production of the purchasing organization. The falling prices of oil impacted the smaller companies by decreasing their revenues, market devaluation, and depleting cash flow. Most of the big organizations like Shell that acquired BG group, look for signals from weak organizations and start the M&A procedure (Williams, Morley, Warga, and Bronstein, 2015).
Examples of Merger and Acquisitions
The following examples are those of Merger and Acquisition deals that happened in the period of 2014-2016 when the biggest oil price fall occurred. The below table lists examples of M&A by U.S. companies. U.S. was the largest player in M&A deals during the oil prices fall.
(Cohen, 2016; Mattioli and Cimilluca, 2015)
Challenges of Merger and Acquisitions
Merger and Acquisitions come with their fair share of challenges, issues, and difficulties. The first and foremost difficulty are the integration of the new organization with the parent organization. The integration factors could be impacted by diverse culture, different skill sets, different work culture, and ethics or even different expectations by the incoming resource staff. In the case of inadequate evaluation of the company that is to be acquired, difficulties may arise for the acquirer company. Inadequate evaluation and high premium could result in both short-term and long term losses for the buyer company. In the process of performing M&A if an organization acquired large debt, then that could also lead to serious long term and short term problems for the organization leading to financial crisis and in some extreme cases bankruptcy (International Monetary Fund, 2015). Similarly, too much diversification is another major challenge that buyer companies face. The challenge comes in the form of management of diverse portfolios and even could lead to the hampering of the core business processes of the organization. The most common form of a challenge faced by most organizations during or after Merger and Acquisition deals is that the managers or the executive members get too much focussed on the acquisition leaving out loopholes and ignoring some of the key elements that define the success or failure of an M&A deal (Berard, 2016).
Benefits of Merger and Acquisitions
Economic advantage and financial leverage is the key benefit of merger and acquisition. In the advent of a global downfall of oil prices, market devaluation of most companies and falling profits, many big companies like Shell (U.S.) took the route of consolidation, merger, and acquisitions to boost their portfolio (ATTIA). The pressure to grow is a constant phenomenon at most companies where M&A is the fastest route to achieving growth. Research shows that above 40% of Merger & Acquisition deals result in significant positive returns for the acquirer. Value enhancement is another major benefit of M&A for the acquirer company. The value enhancement can be from different perspectives like value enhancement through product acquisition, capability development or resource development including manpower and skilled resources. The benefits for buyers span across different sections, resulting in some short-term gains like market valuation, capability and portfolio development, but most of the gains from financial and organic growth are visible over a longer period. Besides, from the highlighted benefits for the buyers, most of the benefits for the sellers include immediate financial and liquidity gains. The premium paid to acquire companies is to the tune of 14% resulting in an immediate benefit for the sellers (Berard, 2016). Merger and Acquisition lead to consolidation in the industry where firms or organizations that are performing well, irrespective of their size, acquire their peers and competitors. This process apart from providing resource, capability and skill advantage to the acquiring company also presents a unique opportunity for lower competition and enhanced market share. With the global turmoil, falling oil prices and lower profit margins, acquisition deals allow buyers to acquire companies in lower valuations and also reduce their competition (Lojanica, 2015).
Summary and Discussion
The global price fall in oil has a major impact on both oil producing and oil consuming companies. However, this period of downfall and sluggish growth has also seen major breakthroughs in Merger and Acquisition of oil companies. The merger and acquisition have been large enough to get the industry in motion and create new powers in the oil industry. M&A by companies is driven by various factors both internal and external. Most of the examples discussed are those companies that are willing to take the risk and take the industry challenge head-on. The SWOT analysis performed depicts that each company must go the M&A route to enhance its market presence based on its internal factors that translate to strength, weaknesses and external market conditions that form the opportunities and threats. Ansoff model shows that how strategies could be applied to organizations that want to perform M&A to achieve certain growth. The examples of M&A presented from the period of 2014-2015 oil price fall clearly show that U.S. has been one the most active countries with regards to Merger and Acquisition deals. U.S. has been a global contributor and also a beneficiary of the positive outlook that was created by a wave of Merger & Acquisition deals even during the biggest oil price fall from the past decade.
Conclusion
The falling oil prices have created a very unstable and gloomy market for the oil industry. The sharply falling prices due to global conditions have impacted not only companies but also countries and could harm the economic and political stability of those countries. However, in these times of downfall, not all companies stay in fear. Some large companies have established a route of Merger and Acquisition to enhance their portfolio, develop capabilities and expand their markets in global locations. The major player for M&A deals that shaped the future of the energy sector has been U.S. where, companies from U.S. have been involved in major deals across the globe in a bid to enhance their market share, expand their portfolio and acquire new products and processes along with skilled resources.
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