Strategic management
Introduction
Merger and acquisition (M&A) is a very common strategy that combines two or more organizations to become a new business. It is agreement between two companies’ to combine their different resources and run operations. In merger, one company is completely absorbed by other company. The merger and acquisition are changes in control of organizations that involve combining the operations of different entities into a single organization. The horizontal merger is a common method that exists between two organizations that are competing in the same industry such as energy sector. It can increase the market share and decrease the competition among the organizations. The merger and acquisition directly affect the top management, employees, and shareholders of the organizations. From 2014 to 2016, the energy sector had faced crises due to low oil price and it generated various mergers and acquisitions within the industry. The continuous decline in oil and gas price has affected the energy sectors and created uncertainties in the industry. The last two years were difficult years for the energy sector, and they affected the entire industry. The market price of oil has decreased in many regions, and the significant decline in natural gas and oil trading has decreased companies’ revenues. It has affected the operations of oil and gas companies, and merger and acquisition took the center stage in transformation strategies of different companies. The energy sector has contributed a major part to the economy of some countries. Therefore, the low oil price has affected those countries’ economy. It has generated uncontrolled supply and weak global demand and effected different countries such as Saudi Arabia, United Arab Emirates, Russia, China, and others. The paper will focus on the merger and acquisition strategy in the energy sector and examples of successful deals between oil and gas companies during 2014 to 2016 and their effects on the companies’ operations.
Merger and acquisition in Energy sectors during 2014 to 2016
The sharp drops in oil prices have affected the operations of many companies that are operating in the energy sector. In early 2014, the oil prices dropped by 60%, and it increased the trend of merger and acquisition in the industry. During 2015, the energy sector was one of the active sectors for merger and acquisition. It was reported as the third most active sector that completed deals of over $3 trillion. It is realized that the U.S was one the targeted country for merger and acquisition and different deals were completed in the U.S energy sector in 2015 . The oil prices have dropped from $110 per barrel in mid-2014 to below $40 in at the end of 2015. It has decreased the market share of companies and affected the whole sector . The prices were unsustainable for many companies, and it generated financial crises for those companies. The organizations had focused on structural cost reduction and developed new strategies to overcome the low oil prices environment. During 2015, when the oil price was stabilized the energy sector remained under pressure and created a wave of merger and acquisition. The lowest deals of mergers and acquisition were realized during the first quarter of 2015. The 40 deals were noticed with a value of $100 million in the energy sector globally . The successful deals were completed between different companies, and some deals are still in process. Some largest companies merged during oil price drop from 2014 to 2016.
The Wall Street Journal has published an article about the energy sector performance and described that a sharp decline in the oil price had increased the merger and acquisition activity in the energy sector. The companies are still under pressure, and it is expected that merger and acquisition activity would continue in future. The sector is facing hostile market conditions, and the large companies are buying smaller companies. It is reported that 1,200 deals of worth $195 billion were completed were completed in 2014 . The biggest example of merger and acquisition are the merger of Royal Dutch Shell by BG group and Schlumberger buy Cameron International.
Shell-BG Group merger and acquisition
After a year of negotiations, the deal was completed between Royal Dutch Shell and BG Group in 2016. It is one of the largest and successful merger and acquisition in the oil sector due to fall in oil prices. Royal Dutch Shell offered shares and cash 50% more than BG Group’s market value to buy it. The shareholders of Royal Dutch Shell have approved the acquisition of BG Group for about $50 billion. The shareholders were agreed to take over BG group and capture the market. Royal Dutch Shell took advantage of low oil prices and acquired BG Group to strengthen its position in the Brazilian market. The CEO of the company, Ben van Beurden said that this is a good opportunity for Shell to take advantage of low oil prices and make strong movements. The company becomes the largest energy sector organization after completing the deal, and it improved the company position. BG Group was a midsize oil company in the Brazilian market and leading competitor for Shell. Therefore, it was a prime target for the company to acquire it. The company is planning to make substantial change to reduce cost, capital investment, and reorganizing upstream
Figure 1 Shell-BG Group merger and acquisition
Challenges and benefits of Shell-BG Group merger and acquisition
Royal Dutch Shell has disbursed highest money to BG Group. However, oil prices are weak. It can create financial issues for the company and may affect its operations. The company may face the challenges of business complexities in the market. The crude oil price is still low and it may affect the company in future. It could increase employee turnover and resulted in the reduction of jobs in the organization. On another hand, Royal Dutch Shell took advantage of low oil price and bought BG Group. The combined entity has become the leading liquefied natural gas company and the largest producer of liquid natural gas in the world. Brazil is a key destination market of the entity and it is looking for Brazil’s vast oil reserves. Royal Dutch Shell would gain large energy reserves and develop oil and gas process to increase the revenues. It has reduced the competition in the market and develops new strategies through shared decision making. It would encourage the company to take advantage of low energy prices and strength its balance sheet .
McKinsey 7s model
It is a method to analyze the company’s organizational design that consists of 7 key internal elements. The elements are strategy, structure, shared values, staff, system, style, and skills. The successful implementation of McKinsey 7s model encourages the Royal Dutch Shell to achieve its objectives effectively. It helps the company to manage the operations and handle different issues and problem that can be generated after merger and acquisition with the BG Group.
Figure 2 McKinsey 7s model
The model is a valuable tool that would increase the effectiveness of Royal Dutch Shell in the market. It has facilitated the organizational changes in the company and run the operations effectively after acquiring BG Group. The effective management of seven variables has pursued growth in the organization and increased its reputation in the Brazilian market. It helped the organization to achieve excellence in the energy sector. The company has direct the employees towards the company goal. The share values are at the center of the model and its foundation of the organization. Royal Dutch Shell have communicated some basic ideas with the BG Group and created an effective decision for growth. The company has created the structure that represents the nature of the business and accountability of the employees.
Royal Dutch Shell has made changes in the organizational chart and managed it effectively. The organization has structured its operations in different ways to achieve the objective of merger and acquisition. The company has created new and innovative strategies to achieve the long-term objective and achieve competitive strategies with the help of strong vision and effective leadership. The new strategies have created to response changes in its external environment. The organization has designed its strategies to transform the new position described by objective. The skills of employees have been considered, and they are trained according to the new changes. The company has designed new training and development programs to improve the employees’ skill and handle the difficult situations. The company has ensured the effective performance of every employee that would help Royal Dutch Shell to achieve its goal efficiently. The effective human resources planning have developed in the organization to manage the staff effectively. The company has managed its staff according to changes in the structure and strategy.
Royal Dutch Shell has closed its three offices in U.K and reduced 1,600 jobs. The merged group would cut 10,300 jobs and handle its position in an era of cheap oil. The strong leadership of Ben van Beurden has ensured the successful results of merger and acquisition. The company has improved its management style and created effective organizational culture. The company has focused on the innovative technological system to maintain its position in the current situation .
Merger and acquisition of Schlumberger Ltd by Cameron International Corp
Schlumberger Ltd is a word leading oil and gas industry that completed the merger with smaller competitor Cameron International Corp during 2016. The sharp reduction in oil companies’ earnings has forced the companies to cut their cost and reduce competition. The companies are the best-known name in the oil- field service and have completed the deal to handle the low oil price situation. The companies were negotiating since months and successfully reached the valued deal of $ 14.8 million. The stockholder Cameron International has received 0.716 Schlumberger shares and $14.44 million cash in exchange for Cameron shares. Schlumberger Ltd. has issued almost 138 million shares and completed the deal .
Challenges and benefits of the merger and acquisition
The merger of Schlumberger Ltd. with Cameron International Corp. can face various challenges and issues in the market. Continued oil price pressure may affect the company operations and decreased its market share. The company has provided the huge amount for completing the deal and it may affect the financial resources. Schlumberger Ltd. has a slow recovery in the domestic and international market. Therefore, some uncertainty arises due to merger and acquisition of Cameron International. The supply-demand imbalance of the oil market has decreased the company revenues of $6.5 during the first quarter of 2016. The company has closed some offices in different regions and cut its human capital. The company would take some advantage of the merger and gain competitive advantage in the market.
Schlumberger Ltd. takes the advantage of low oil price and buys Cameron International Corp. The deal would improve the company performance and increase its reputation in the market. The merger would reduce the competition among the companies and provide benefits to the new entity. It is focused on technology and innovation that would improve the performance of the system. It can improve drilling and production system and enhanced the quality and safety of the field operations. The CEO of Schlumberger Ltd., Paal Kibsgaard has considered improving the performance of the operations through the new business model. The company would manage the cost-effectively and increase customer satisfaction by meeting their demands effectively. The company would generate better performance for their customers. The employees of new entity can integrate their efforts and achieve its goal together. The top management of both companies can take an effective decision through strong communication and integration .
Porter’s Generic Strategies Model
Schlumberger Ltd applies the Porter’s Generic Strategies Model in the new entity and improves its performance in the market. The organization can gain competitive advantage through three basic strategies include cost leadership, differentiation, and focus. The method helps the company to increase its sales and revenues. The company has applied the cost leadership strategy to reduce its cost and provide valuable products and service to its customers in reasonable price. The company has focused on customers’ demands and improved its performances to meet their needs effectively. The merger of both companies has reduced their operational cost and labor cost that has promoted the technological development in the new entity. The company has announced to close its operations in Venezuela to manage the capital efficiently.
Broad Scope
Narrow Scope
Source of competitive advantage
Figure 3 Porter’s Generic Strategies
It has improved utilization of assets and increased production capacity of the organization. The strategy has controlled functional groups such as finance, marketing, inventory, supply, logistics, and others. It has increased production volume and market share of the company through the merger of Cameron International. The management is focused on improving operational performance through a high level of cost efficiency. The company has applied differentiate strategy and used advanced technology to provide unique and innovative services from its competitors. The customers’ matters and issues are strongly focused and various techniques are planned to overcome that issues. The organization has improved its research and development methods and delivered high-quality products and services. Both companies have integrated their technology and human capital to provide effective solutions to the customers that working in oil and gas globally. The company has used focus strategy and concentrates on different markets in the world. The company has offering improved products and services in the market .
Conclusion
It is noticed that sharp reduction in oil prices has affected the energy sector. The oil and gas companies have experienced different issues due to market uncertainty. It has reduced the revenues of oil-exporting countries that resulted in the higher deficit. It has affected the operations of oil and gas companies. The continued falling in oil prices has increased the importance of merger and acquisition. Different companies have merged and some large companies have acquired smaller companies. It has improved the operational performance of the companies through collective efforts of two or more than two companies. The supply-demand imbalance is expected to continue during rest of the year. Therefore, it creates uncertainty in the oil market. It can increase the merger and acquisition activity in oil and gas companies.
List of References
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