Takeover Mergers Acquisitions Case Study Of British Petroleum Commerce Essay

putsch fusions Acquisitions Case Study Of British Petroleum job EssayBP is single of the largest vertic onlyy integrated oil color color and assail companies in the world. The fraternitys operations primarily include the exploration and output signal of gas and jolting oil, as headspring as the commercialiseing and trading of ingrained gas, forcefulness, and natural gas liquids. BP has its headquarters in London, wholeed Kingdom and employs about 80,300 people.British Petroleum, which transform from a local oil familiarity named Anglo Persian form back in 1908 to a global efficiency group, is one of the worlds largest energy companies today, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products for e actuallyday items. BP excelled exponentially in the past century and today it employs over 80,000 people and operates in over 100 countries worldwide.On 20th April, 2010, BP came across a belatedly w ater rig explosion in the gulf of Mexico which was ca phthisisd by what has been expound as the worst US ecological disaster ever, wiping more(prenominal) than $58 billion from the go withs value and causing its sh be price to drop rout more then half comp atomic number 18d to the value before the explosion.M either analysts be saying that this could trigger a coup detat of the cable by one of its big competitors such as Exxon Mobil, Shell or even Petromainland China.In this report, we forget discuss the factors and reasons which stomach impression in a putsch of all order a coherent with the rattling real disadvantages which a company whitethorn face if they do an achievement, including those special to an acquisition of BP at this m.What is Merger and Acquisition stands for?The terminal figure Merger Acquisition or coup detat refers to the expectation of merged strategy, embodied finance and management dealing with the buying, selling and corporate trust of different companies that fundament aid, finance, or help a growing company in a hold backn patience grow rapidly without having to draw other business entity.Takeovers and mergers are too the reason why todays corporate landscape is a maze of conglomerations. Insurance companies pop rancid birth breakfast cereal grass makers, shopping mall outlets are part of military manufacturing groups, and movie studios own airlines, all because of mergers and acquisitions.Although often used synonymously, the terms merger and acquisition inculpate slightly different things.MergerA merger happens when two dissipateds jibe to go forward as a single untested company rather than remain separately owned and operated. It faecal matter be exposit as the mutually agreed decision for joint ownership amongst organizations.When two companies merge, the boards of directors (or the owners, if it is a one-on-onely held company) come to an agreement. The original companies cease to exist, a nd a new company forms, combining the personnel and assets of the merging companies. Like any business deal, this can be straightforward, or incredibly complex. The key is that twain companies have agreed to the merge.AcquisitionWhen one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal distri notwithstandingor point of view, the target company ceases to exist, the buyer swallows the business and the buyers stock continues to be traded. unpeaceful Takeover A hostile coup detat is an acquisition in which the company existence purchased doesnt want to be purchased, or doesnt want to be purchased by the grouchy buyer that is making a bid. The buyer has to put one across interpret of the target company and force them to agree to the sale.Both acquisitions and mergers typically select the managers of one organization exerting strategical influence over the other.Reasons for a TakeoverThere are differen t reasons for developing through a takeover activity. The primary reason being that acquiring firms seek improved financial performance. Another study reason is the need to keep up with the ever-changing environment and to gain opportunities of market fruit more quickly than through internal means. Following gives a brief account for the conventional reasons of a takeover.Speed of En decideSpeed of entry is one of the reasons for a takeover because products and markets nowadays are changing so rapidly that acquisition befits the whole mode to successfully enter a market, since the process of internal growing is too slow and when speed is important, acquisition is more believably to be used. most(prenominal) acquisitions are consummated relatively quickly, whereas internal development of new products or services normally takes many months or age. Acquisition may allow the acquiring firm to realize revenue earlier, achieve economies faster, and beat a capitaler market a ppropriate. When entry occurs through internal development, a cristal or more is often required to fine-tune the business to achieve the profitability of established competitorsEconomies of ScaleEconomies of weighing machine is an economic term describing a business model where the long-run average court submit declines as production add-ons, or in a simple eccentric explaining the principal, where a manufacturing company saves money as it make waters eminenter(prenominal) quantities of its product, as in all business areas, the more you buy, the more you save. Economies of scale is a long run concept and refers to reductions in unit cost as the sizing of a facility and the usage levels of other inputs increase.This refers to the fact that the company later takeover can often reduce its laid cost by removing duplicate departments or operations, lowering the costs of the company relative to the corresponding revenue stream, thus increasing profit margins.An example is that of a offstage soft drinks manufacturer. The more orders that the manufacturer receives, the more savings it makes, as it leave alone in rise get cheaper prices for the materials it needs to produce its drinks (e.g. plastic, aluminium, sugar) as it leave alone be buying them in larger quantities and receiving discounts, the manufacturing company in deflect would give its customers cheaper prices for the more orders for drinks they make for this very reason, as they will gain the discounts, they can pass a saving onto their customers, making themselves stronger, a more respected company from its suppliers as it is buying in high volumes and its disturbance becomes high. All these factors contri alonee to the attains of economies of scale..Why Economies of Scale Happen An In abstruseness LookCorporations incur meliorate costs when buying heavy machinery, buildings, or other large purchases. A firm cost is called fixed because when production increases in the short run, new buildings and machines are not immediately needed. Because fixed costs are not tied to production, firms have an incentive to produce as much as possible (assuming they can sell their product). Intuitively, a large factory should produce a large number of units to smear its fixed cost per unit. Say that an automobile factory costs 1 zillion dollars. If it only produces metre cars, then its Fixed Cost Per Unit is 1 million dollars split up by 1000 cars, or $1000/Car.If the factory produces 8000 cars, however, its Fixed Cost Per Unit is 1 million dollars divided by 8000 cars, or $125 per car. By producing 7000 more cars, the firm gets an 88% fixed cost reduction per car.This graph illustrates that increased production reduces fixed costs per unit.Figure 1With fewer fixed costs per unit, firms can afford to lower per unit prices. If fixed costs are very significant to a particular firms perseverance, then firms who atomic pile produce efficiently can cut costs, extract revenues, lower prices, and therefore capture market parcel. Higher market share and higher revenues mean more money to spend on machinery, and expand the firm. This in turn allows further cost cutting, higher production, and the development of better products. In the long run, firms which effectively mass produce take over industries dominated by high fixed costs.Figure 2Financial marketsFinancial markets may provide conditions that make acquisitions. If the share value or price/earnings (P/E) ratio of a company is high, it may see the opportunity to acquire a firm with a low share value or P/E ratio. Indeed, this is a major stimulus for the more opportunistic acquisitive companies. An uttermost(prenominal) example is asset stripping, where the main indigence is short-term gain by buying up undervalued assets and disposing of them piecemeal.Eliminating CompetitionA buyer company, when absorbs a major competitor, eliminates the major competition and thus increases it revenue or market sha re. This motive of takeover comes into play when companies want to increase their market power which heads in an increased share value and overall monopoly. synergismSynergy is the emf additional value from combining two firms. It is probably the most widely used and misused rationale for takeovers.Operating SynergyOperating synergies are those synergies that allow firms to increase their operating income, increase growth or both. useable synergy is deemed to be the main motive of the takeover when the bidder takes over a target in the like industry. We would categorize operating synergies into four types.1. Economies of scale that may turn off from the takeover, allowing the combined firm to become more cost-efficient and gainful.2. Greater pricing power from reduced competition and higher market share, which should result in higher margins and operating income.3. Combination of different practicable strengths, as would be the case when a firm with strong merchandising sk ills acquires a firm with a good product line.4. Higher growth in new or existing markets, arising from the combination of the two firms. This would be case when a UK consumer products firm acquires an emerging market firm, with an established dissemination network and brand name recognition, and uses these strengths to increase sales of its products.Operating synergies can affect margins and growth, and through these the value of the firms involved in the takeover.Financial SynergyWith financial synergies, the payoff can take the form of either higher cash flows or a lower cost of capital (discount rate). include are the following.1. A combination of a firm with profusion cash, (and circumscribed project opportunities) and a firm with high-return projects (and limited cash) can yield a payoff in terms of higher value for the combined firm. The increase in value comes from the projects that were taken with the excess cash that otherwise would not have been taken. This synergy is likely to show up most often when large firms acquire smaller firms, or when publicly traded firms acquire private businesses.2. Debt capacity can increase, because when two firms combine, their earnings and cash flows may become more stable and predictable. This, in turn, allows them to borrow more than they could have as individual entities, which creates a tax benefit for the combined firm. This tax benefit can take the form of either higher cash flows or a lower cost of capital for the combined firm.3. Tax benefits can arise either from the acquisition taking advantage of tax laws or from the use of net operating losses to shelter income. Thus, a profitable firm that acquires a money-losing firm may be able to use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able to increase its depreciation charges after(prenominal) an acquisition will save in taxes and increase its value.DiversificationCompanies takeover different product line companies to diversify their product or service range and to harbor themselves against downturns in the core markets. This calls for a very well thought and limited policy keeping in mind the future steps and goals of a company. Moreover, can genuinely help if there is a down settle in the core market and company shares of a particular product.Disadvantages of a TakeoverThe reasons for takeover are kept under account while targeting a company, but calculating the disadvantages associated with it are analysed with more precision and taking all situations under consideration. Companies mostly come up with the following disadvantages while acquiring other companiesCosts of mergers and acquisitionsMergers and acquisitions can be costly due to the high legal expenses, and the cost of acquiring a new company that may not be profitable in the short run. This is why a merger or acquisition may be more of strategic corporate decision than a tactical maneuver. Moreover, if a poison table t unknowingly emerges after a sudden acquisition of another companys shares, this could gift the acquisition approach very expensive and/or redundant. Legal expenses short-term opportunity cost Cost of takeover Potential devaluation of equity intangible asset costsMA activity can also be exacerbated by the short-term cost of opportunity or opportunity cost. This is the cost incurred when the same amount of investiture could be placed elsewhere for a higher financial return. Sometimes this cost does not prevent or discourage the acquisition because projected long-term financial benefits outweigh that of the short-term cost.Consumer and shareowner drawbacksIn some cases, acquisitions may not only disadvantage the shareholders but consumers as well. In both cases, this may happen when the newly formed company becomes a large oligopoly or monopoly. Moreover, when higher pricing power emerges from reduced competition, consumers may be financially disadvantaged. Some of the potential disadvantages face consumers in regard to mergers are the following. Increase in cost to consumers fall corporate performance and/or services Potentially take down industry innovation Suppression of competing businesses Decline in equity pricing and investment valueShareholders may also be disadvantaged by corporate leadership if it becomes too content or complacent with its market positioning. In other words, when takeover activity reduces industry competition and produces a efficacious and influential corporate entity, that company may suffer from non-competitive stimulus and lowered share prices. Lower share prices and equity valuations may also arise from the merger itself being a short-term disadvantage to the company.Effects on managementA study published in the July/August 2008 yield of the Journal of Business Strategy suggests that mergers and acquisitions destroy leadership continuity in target companies top management teams for at least a decade following a deal. The study found that target companies get 21 percent of their executives each year for at least 10 years following an acquisition more than double the turnover experienced in non-merged firms. If the businesses of the acquired and acquiring companies overlap, then such turnover is to be expected in other words, there can only be one CEO, CFO, etc at a time.Wages SettlementThis could also be a conundrum if the acquiring company gives less wages to its employees then the acquired company. This may result in overpaying the new employees of acquired company or increasing the wages of its earlier employees. This can really unsettle the budget and administration of the company.REASONS AND DISADVANTAGES OF TAKING all over BRITISH PETROLEUMThe idea of BP being taken over by anyone would have sounded crazy before the gulf of Mexico disaster, but it is now nice commonplace to suggest that the UK oil major might even fall into the hands of rivals like Exxon Mobil, Shell or even Petrochina.T he about turn has been extraordinary. Before its money and reputation began bleeding away in the disconnectedness of Mexico, the oil giant was considered the safest of blue chip companies, because its debts were so low and its income so high.bits per second failure to stop an oil leak from spewing millions of gallons of crude into the disconnect of Mexico may leave the biggest oil and gas producer in the U.S. in a fight to stay independent.BP FactsClean-upCost to date $3.1bn approxEscrow account see $20bnSharesShare price on 20 April (before leak began) 656pShare price lowest point (on 25 June) 296p (55% fall)2009 profits 10bn2010 dividend 1.8bn in Q1 Q2-4 cancelled, saving 5.4bnDebt derive debts 17bn, of which 4.9 due by end-20112009 cashflow 21bnCredit ratings A2/A (Moodys/SP)Credit default swap spread (5 years) 4.1% per annumStrategic investorsMarket capitalisation 65bn (at 345p current share price)capital of Kuwait shareholding 1.75%China shareholding 1.1%(Data Bloomberg as o f 6 July 2010)Reasons for TakeoverIn addition to being the largest oil and gas producer in the U.S, BP is the biggest operator in the disconnect of Mexico, where it holds more than 500 leases and pumps 450,000 barrels of oil a day. The company plans 10 projects in the Gulf during the next five years, more than other regions of the world, correspond to a BP presentation. A takeover of BP will result in the acquisition of all these projects ultimately increasing the growth of the acquiring company.A takeover by Anglo-Dutch shell looks likely because synergies of $9bn had been estimated by former BP chief master copy Browne and it is revealed that merger of these companies were tried before in 1995 and 2004. These synergies will give the combined company the power to take advantage from economies of scale and great pricing power.If Exxon Mobil acquires BP that would be a combination of the first and second biggest gas producers in the US which will result in the monopoly of the whole oil market in the hands of the acquirer. If this happens, the joined company can ordinate the stock market and gain other advantages as well.Chinese oil giant Petrochina which is not a major oil producer but an avid consumer of oil can divert scarce oil supplies of BP towards china to satisfy its needs rather than those of the west. This will not only give Petrochina access to BPs international oil and gas reserves, but also the expertise and latest technology which will result in higher value and growth of the combined company.The takeover will eliminate a fierce competition between the oil giants of the world as the acquiring company will absorb a major competitor in the form of BP. Thus increasing overall market power and share value.DisadvantagesThe huge and indeterminate cost of the oil spill violent death, as well as damages, fines and compensation analysts forecast of the cash cost to BP have ranged up to about $40 bn, could spiral into tens of billions.Political EffectsTe chnically any of Exxon Mobil, Shell or Petrochina can afford to buy BP, but in an industry which is already fraught with regulatory and political risk, it is a tight to cope up with all the arising situations.There is already a statutory limit under US law for oil spill costs of a mere $75m, but BP long ago waived this limit, as secrecy behind it would have been politically untenable.The oil firm could take more active steps to limit its obligation, for instance through a discriminating bankruptcy of its US business.But this would almost certainly be uneatable to the companys board, as it would enrage US politicians, including President Barack Obama, and probably cut off the entire US market to BP.So the political reality is that BPs liability in the Gulf of Mexico remains unlimited, and this continues to weigh down the companys share price.A takeover of BP in such a scenario will result in an unlimited liability for the acquiring company. Moreover, it may probably shortcut fro m the U.S market where BP is the biggest oil and gas provider.Environmental EffectsThe environmental threats after Mexico oil spills are still in account and acquiring companies will feel the effects of it for a long time. The cost of oil cleanup is indeterminate and in case of an acquisition, those cleanups and its effects will become the liability of the acquiring company and if they fail to clear them in a particular set of time, then the acquired company can feel the heat as well.Legal EffectsThe damages, fines and compensation forecasts of the spill are very ill-defined and there is no exact account of the litigations which BP will face. BP has crossed the $368 million mark till now in paying companies and individuals as a result of after-effects of the oil spill. Still there is a long way to go and no one wants to pay an unquantifiable liability.Other DisadvantagesIf Shell makes a move, then it will ace serious competition issues that would force divestments in Europe and the US. A combined company will be very difficult to manage and to sustain growth.Petrochina will be in a risk of overpaying the employees of BP as labour is cheap in Chinese companies and this could really effect the management and workforce from top to bottom.In case of Exxon Mobil, Most combinations of assets would have to be downsized for competition reasons. The overlapping management will lose their jobs and the old management will have to fit in the tog of the BP management and become familiar with their systems and ways which will take time and incur cost.The costs of oil projects are set to soar as governments insist on tougher environmental safety standards in the wake of the spill. already the Kazakhstan energy ministry has forced Shell to tighten up plans at its Kashagan development, gist that the current $136bn budget dedicated for the project is likely to be busted. The result could be that smaller companies, that dont have market values in excess of $100bn might pull out of deep-water activities. Only the big boys of the industry would remain in the waters.ConclusionThere are many likely motives to takeover BP but it carries a lot of dips and drops. If a buyer does try to overcome all these enormous hurdles, it would still need to agree a deal. At the moment, there is no sign of BP to surrender. Takeover talks are likely to keep swirling, but the chances are that BP will emerge with its liberty intact.