BP-Amoco raises questions
of other oil industry accords
By Steve Liesman and Christopher Cooper
THE WALL STREET JOURNAL
The day after British Petroleum PLC said it would buy Amoco Corp. in the largest industrial merger ever, investors began to focus on two questions: Is bigger really better? And, who will be next?
THE TOP EXECUTIVES of the two companies, in presentations to New York analysts and in interviews, maintained that the combined companies would be able to do far more than they could separately - and do it more cheaply. But they acknowledged there would be quarterly charges along the way and that, as far as London-based BP was concerned, the deal wouldn't add to earnings until next year.
Still, the accord helped move up stock prices of most major oil companies, with Mobil Corp. climbing $1.3125 to close at $66.75 and Atlantic Richfield Co. rising $1.125 to close at $65.875. Amoco advanced $1.3125 to close at $48.1875, while BP gained $1 to close at $78.375.
Analysts said the pairing of BP's international strength and Amoco's U.S. presence likely will set a standard for such large mergers. "Amoco had lots of gas and BP had lots of oil, which made a neat little package with very little overlap," said Dave Pursell, analyst with Houston investment firm Simmons & Co. Additionally, he said, the two companies probably will survive antitrust scrutiny since their retail markets are dissimilar.
LOOKING AT `SYNERGIES'
Beyond the $2 billion in savings the companies expect to see from the $48.2 billion deal, BP Chairman John Browne said he expects additional savings, as well as growth opportunities that would bolster the bottom line.
Mr. Browne pointed to such areas as Azerbaijan, the oil-rich Central Asian nation where both companies are major players. "We have two duplicate staffs there looking at the same problems," Mr. Browne said. Other "synergies," as Mr. Browne called them, would come in deepwater exploration and production where BP could bring its expertise to Amoco's fields in the Gulf of Mexico. Similarly, the deal would combine Amoco's lower development costs with BP's cheaper findings costs. All of these savings, Mr. Browne said, aren't included in the projected $2 billion worth of savings.
But some analysts, though agreeing that longer term the companies are a good fit, are skeptical in the near term. They say the merger of a company such as BP, with a high rate of return of capital, with one such as Amoco, whose returns are lower, mathematically must take something away from the better performer.
CHALLENGES TO FACE
Michael C. Young, integrated-oil analyst at Deutsche Bank Securities in Boston, estimates the deal will dilute BP's earnings by about 5% in 1999, contradicting Mr. Browne's assertion that it would be neutral to the company's earnings. BP, Mr. Young said, paid a 15% premium for Amoco and that "has a dilutive effect."
Scott Sanderson, partner at Deloitte Consulting in Chicago, said the challenge for Mr. Browne, who will be chairman of the new company, will be maximizing the assets of the two companies, including selling off the unprofitable pieces and unfolding layers of bureaucracies that have built up over 100 years.
"I don't think scale alone is going to deliver the value that shareholders require," Mr. Sanderson said. "It has to come from the way you bring the two companies together and the way you simplify operations."
Still, the thinking on Wall Street was that more oil companies would be seeking the kinds of scales achieved in the BP-Amoco merger. Doug Terreson, of Morgan Stanley Dean Witter has circulated the theory that Big Oil mergers are an inevitability, as middling-size integrated-oil companies find themselves squeezed by global behemoths such as Exxon Corp. on one end and nimble independents on the other.
OTHER POSSIBLE COURTSHIPS
Mobil Corporation (MOB)
price change
$66.75 unch
Atlantic Richfield Company (ARC)
price change
$65.88 unch
Morgan Stanley Dean Witter & Co. (MWD)
price change
$80.25 unch
Exxon Corporation (XON)
price change
$67.06 unch
Phillips Petroleum Company (P)
price change
$43.63 unch
Data: Microsoft Investor and S&P Comstock 20 min.delay
Other analysts share Mr. Terreson's view. Fadel Gheit, of Fahenstock & Co., sees Phillips Petroleum Co. as a target. A spokesman for Phillips, based in Bartlesville, Okla., declined to comment.
Mobil has the dubious distinction of having failed courtships with both Amoco and BP during the past few years. Mobil, which agreed to a European refining and marketing merger with BP two years ago, also held extensive talks with the British oil concern about a full merger, people close to the discussions say. The talks broke over disagreements about who would run the merged company.
Those same people said Mobil held talks with Amoco last spring. A Mobil spokesman declined to comment.
"This puts a lot of pressure on Mobil," the fourth-largest oil company behind BP, but now a distant fourth, says Arthur Tower III, analyst for Howard Weil in New Orleans. "The competitive pressure is not going to abate."
Mr. Pursell of Simmons said he also could see more global mergers, such a combination of a U.S. company with another large European firm.
While some analysts have criticized BP for paying a premium for Amoco, such deals are likely to be the norm so long as oil prices remain low and stocks in the sector remain weak, said Mike Madden, of Hanover Capital, an investment-banking company. While deteriorated stock prices help encourage mergers, they also can make them harder, since most deals are stock swaps and the stock of the purchasing company is just as weak as the company being purchased. "It's changing the way deals are done," Mr. Madden said. "It means that a deal requires a sweetener."
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