Analysis Of The Use Of M&A Strategy In Energy Sector

Explain Analysis of the Use of M&A Strategy.

In order to gain the profitability and competitive advantages, every organisation engages in the different strategies and plans. These plans and strategies help the firms to compete in the market and develop supportive relationship with the different stakeholders to generate positive corporate image (Dor, Dynkin and Hyman, 2011). In this, the merger and acquisition strategies are effective to generate values to the organisations, which also enable them to generate more profits from the collective operations. Acquisition strategies offer various benefits to the companies such as cost cutting, large insights of market, improving in performance and creating market access for product (Lacity and Willcocks, 2015).

In this concern, this report critically analyses the merger and acquisition strategy that are used by the companies in energy sector during the oil price drop of 21014 to 2016. With the help of appropriate academic models, this report also discusses the challenges and benefits of merger and acquisition strategy with the examples of energy sector companies.

In recent years, the strategy of merger and acquisition has gained lot of popularity in order to capture the market of other companies in the respective fields. It is analysed that in the energy sector, there are many companies that use this strategy to meet the needs and demands of customers and achieve profitability and growth. During the oil price drop of 2014 to 2016, the energy companies used M&A strategies to strengthen their competitive position. It is because due to drop in oil price, merger companies enabled to not to overpay the money at the time of merger and acquisition activity (Deloitte, 2016). It helped the companies to save their money on merger.

It is found that in the global energy sector, the volatility in the oil price levels influenced most of the aspects of industry’s performance. It is because due to volatility in oil price, the actual profitability figures of oil and gas companies has come, which made the M&A activities more effective during the oil price drop of 2014 to 2016 (Bertocco, Keuer and Milisavljevic, 2015). For example, in the merger and acquisition between Sabine Oil & gas and Forest Oil Corporation, Sabine Oil and Gas Company merged with Forest Oil Corporation. It helped both the firms to capture the market area as well as assets to increase the profitability. Through this, both the organisations have also enabled to develop the internal strengths to capture new market opportunities in effective ways (Business Wire, 2014).

It is analysed that during the year of 2104 to 2106, the low oil price distressed the oil and gas companies. It also generated the wave of merger and acquisition as most of the companies wants to recover their price due to loss by the low price of oil. In this, the merger and acquisition strategy helped the oil and gas companies to provide benefits to the shareholders and enhance the effectiveness and success of merger in the energy sector (Scheck and Raice, 2014).

Along with this, it is also identified that merger firms effectively used the merger and acquisition strategy during the oil price drop of 2014 and 2016 in terms of establishing defensive mergers. As per the PEST model, there are various factors that influence the merger strategies of oil and gas companies. In this economic factor is one of the external factors that affect the merger strategies (Chorafas, 2016). For example, during the low oil price of 2014 to 2106, in the merger between Shell and BG Group, due to demonstration of decreasing in oil price, the firm decreased the value of its oil and gas assets by nearly £6bn. At the same time, Shell also announced to cut its spending by approx £10bn for the next three years (BBC News, 2015). It helped the new merger to gain effective profits and remain competitive in the crisis situation.

In support of this, it is also identified that during the low oil price of 2014 to 2016, the oil and gas companies also used the M&A strategies to develop the strength in terms of enhancing the product and service portfolio. Through this, the companies also enabled to provide greater values to the customers that also supported them to increase profitability during the low oil price period (Gomes, Weberand Brown, 2011). On the other hand, it is also analysed that at the time of sharp decline in the oil price, the weaknesses of oil and gas companies in merger and acquisition also has emerged in terms of managing the stress of balance sheet. It is because decline in the oil price negatively affected the profitability of the merged firms that also impacted on the relationship and created a reason of merger failure (Hotten, 2014).

But, at the time of low oil price in the market, mergers and acquisitions were increasingly recognised as an effective way of spreading risks in both upstream and downstream functions. It also helped the companies to cut their costs and achieve economies of scale (Dor, Dynkin and Hyman, 2011). For example, at the time of depressed oil price, the merger of BP and Amoco helped the oil industry to provide more effective products and services. In this, the firm announced to operate in all the industry segments, manage more than 130 business units in more than 100 countries. It also helped the merger to achieve profits and competitive advantages (Gomes, Weber and Brown, 2011). According to Chon (2012), the growth strategy model indicates that strategic acquisition is effective for the companies to follow the strategy of transformation. Due to this, the companies are also enabled to mitigate the challenges that they face during the crisis situations. It also helps the firms to achieve competitive advantages over their competitors.

In similar ways, it is analysed that during the low oil price of 2014 to 2016, the oil and gas companies effectively used the merger and acquisition strategy to mitigate the gaps and access the financial resources of each other to meet the organisational goals and objectives. For example, in the case of BP and Amoco merger, BP effectively used the resources of Amoco, which enabled the firm to hold a stronger market position in different countries that also supported the firm to achieve competitive advantages in the depressed oil price situations (Lacity and Willcocks, 2015).

At the same time, the fall in oil price also helped the oil and gas companies to develop their relationship with the same sector companies. As per the SWOT analysis model, it is found that due to sharp fall in the oil price, global energy companies received the opportunities to expend their market in the developing countries like India and Indonesia by developing strategic partnership with the local companies. It is because expanding market in developing countries enabled the global energy companies to save their cost on R&D as well as establishment of plant to explore the oil and gas from the resources (Lacalle and Parrilla, 2015).

On the other hand, in the energy sector, the oil and gas companies also used the merger and acquisition strategy in order to mitigate the cash flow problems. For example, the consideration of merger of Salamander Energy by Ophir Energy was based on the cash flow problems. In this merger, corporate purchase has taken place at the bargain price, which helped the firm to force investors to exit their investment quickly and realise cash at any price (Armstrong, 2014). Due to this, the Ophir effectively resolved the cash flow problems due to fall in the global oil price.   

In order to accomplish merger and acquisition in the energy sector, a company faces various challenges and problems to make it successful. In the merger and acquisition process, it is the difficult task to analyse which company will stay and which will go out (Belyi, 2013). It is a major and concerning decision for the companies’ board of members and their equity shareholder. It is not possible for a company to go out from the market, which continuously earning good profit as well as it is also not possible for the debt bringing company to stay much time in the market. Along with this, it is also a challenging aspect to identify the proper reason behind the communication of merger and acquisition. It is because; it is difficult for a company to find out actual interest of another company behind the M&A activities (Campbell and Wöstmann, 2013).    

During the time of oil price drop of 2014 to 2016, most of the merger and acquisition companies faced the challenges related to the finance. It is because due to fall in the oil price, the companies unable to generate much finance to pay to the investors their money. It also created issues related to the failure merger strategies adopted by several companies such as AOL and Time Warner Company. According to the SWOT analysis, energy sector has many opportunities such as favourable government policies, earn high profit, minimum competition, etc. (Cartwright and Cooper, 2012). So, capital is required to take the benefits of various opportunities. In the oil and gas industry, sometimes challenges can arise in the marketing of the petroleum product, pipelines of petroleum product.

An acquiring company also faces the challenges in comparing the benefits, compensation, culture, dividend, taxation, HR policies of both companies because every company have different policies regarding them. AOL and Time Warner merger is failed due to the lack fulfilment of the commitment from each side (Fu and Zhang, 2011). It is the main challenge in the merger and acquisition to complete the pre-determined commitment.      

It is difficult for a company to create value after the M&A in the energy sector. It is because; M&A activities can break the price of the oil and gas at extent level because it is possible that financial debt amount of transferred from acquired company to acquiring company (Holburn and Vanden, 2014). If the amount of debt is much higher compared to profit earning per year that time, it is difficult for an acquiring company to make the profit and overcome from debt.

Often, it has been seen during the merger and acquisition, companies fail to achieve the predetermined targets. It is because; a company cannot focus on the business objective until the deal has closed. Sometimes, mismanagement also becomes the reason of the missed targets. It is difficult for the management team to manage two companies’ activities at the initial stage. Merger and acquisition bring up the problem of the loss of the key people in the organization. At the time of the deal, the company requires the renormalization the organizational structure and delegation of the leadership (Inkpen and Moffett, 2011). The delegation of the authority is also a critical aspect for the firm due to there is the requirement of concentration on both companies’ candidate.

A successful M&A is that which involves the focus on the both operational and cost effectiveness of the companies involved in the deal. It is an interesting aspect for the reader to enhance the knowledge on the benefits of the merger and acquisition in the energy sector. Merger and acquisition activities provide various types of benefits for the both acquired and acquiring companies. Through the M&A activity an oil and gas company can pay their debt in the time of crude oil are collapsing (LaMattina, 2011). As per the SWOT analysis, it is stated that merger and acquisition provide different types of strengths to the energy sector namely strong technology development, quality human resource and large market share (Campbell and Wöstmann, 2013). Similarly, during the oil price drop, the M&A strategies helped the companies to receive these benefits by developing greater relationship with each other. The taxation is also a benefit for the acquiring company in the merger and acquisition activities. It is because, the government provides taxation reduction in the merger and acquisition activities that leads to the decline in the tax liabilities. In the energy sector, if a company acquires another country’ companies that time acquiring company, which helps the companies to save their costs.

During the oil price drop, the M&A in the oil and gas industry also helped the firms to achieve economic of scale. A major example of the economies of scale involves Sabine Oil & gas and Forest Oil Corporation in which the new merger enabled to reduce the cost of its production by using the valuable resources of both the companies. Acquiring a company in the same industry is increased the production level with more efficiency in the production. In the energy sector, M&A is a most appropriate way of the expanding their business at the large scale (Rothaermel, 2015). Through the merger and acquisition, a firm can take advantage of the market opportunities. It also reduces the competition in the market and helpful for a company that wants to enter the new market.

Merger and acquisition provide higher market share to an oil and gas industry for conducting business activities. In the case of oil price drop, a strong financial company purchases smaller company that provides the benefits to the stronger financial company to achieve customer base as well as resources of that company Due to this, firm is also benefited in terms of cost-efficient and time consuming (Wstenhagen and Wuebker, 2011).

Shell and BG group merger provided to organic growth to the acquiring company. The decision of Shell to acquisition in the same sector helped in reducing the operational cost of organization as well as increasing the revenue of the firm. It is also beneficial in terms of increasing the supply chain and pricing power. Thus, the combination of the two companies in the energy sector enables to enhance the work performance and strength of business network by improving market reach (Belyi, 2013).       

Conclusion

From the above discussion, it can be concluded that during the oil price drop of 2014 to 2016, the merger and acquisition strategy is one of the effective strategies that adopted by the energy sector companies to reduce the negative effects of low oil price. It also helped the companies to expand their businesses in new markets as well as provide better and effective services to increase the customer base in the crisis situations. The energy sector companies also used the merger and acquisition strategies to provide the benefits to the investors in terms of giving better returns on their investments.

At the same time, it can also be concluded that the oil and gas companies also used the merger and acquisition strategy to manage the balance sheet stress and cash flow problems significantly. It also helped the oil and gas firms to meet the needs of cash and provide profitability by establishing a strategic relationship with the other companies in the different countries. 

References

Armstrong, A. (2014) Ophir agrees £314m takeover of Salamander. [Online]. Available at https://www.telegraph.co.uk/finance/newsbysector/energy/11249706/Ophir-agrees-314m-takeover-of-Salamander.html [Accessed: 8 July 2016].

BBC News (2015) Royal Dutch Shell to buy BG Group in £47bn deal. [Online]. Available at https://www.bbc.com/news/business-32213341 [Accessed: 8 July 2016].

Belyi, A.V. (2013) Institutional trends in Russia’s oil and gas sectors. The Journal of World Energy Law & Business, 5(6), pp.39-45  .

Bertocco, R., Keuer, W. and Milisavljevic, M. (2015) Preparing for the Coming Wave of Consolidation in Midstream Oil and Gas. [Online]. Available at https://www.bain.com/publications/articles/preparing-for-the-coming-wave-of-consolidation-in-midstream-oil-and-gas.aspx [Accessed: 6 July 2016].

Business Wire (2014) Sabine Oil & Gas and Forest Oil Announce Definitive Merger Agreement. [Online]. Available at https://www.businesswire.com/news/home/20140506005979/en/Sabine-Oil-Gas-Forest-Oil-Announce-Definitive [Accessed: 6 July 2016].

Campbell, C.J. and Wöstmann, A. (2013) Campbell’s atlas of oil and gas depletion. UK: Springer.

Cartwright, S. and Cooper, C.L. (2012) Managing Mergers Acquisitions and Strategic Alliances. UK: Routledge.

Chon, K. S. (2012) The Growth Strategies of Hotel Chains: Best Business Practices by Leading Companies. UK: Routledge.

Chorafas, D. N. (2016) Energy, Environment, Natural Resources and Business Competitiveness: The Fragility of Interdependence. USA: CRC Press.

Deloitte (2016) The impact of plummeting crude oil prices on company finances. [Online]. Available at https://www2.deloitte.com/ng/en/pages/energy-and-resources/articles/crude-awakening-the-impact-of-plummeting-crude-oil-prices-on-company-finances.html# [Accessed: 6 July 2016].

Dor, A. B., Dynkin, L. and Hyman, J. (2011) Quantitative Credit Portfolio Management: Practical Innovations for Measuring and Controlling Liquidity, Spread, and Issuer Concentration Risk. USA: John Wiley & Sons.

Fu, X. and Zhang, J. (2011) Technology transfer, indigenous innovation and leapfrogging in green technology: the solar-PV industry in China and India. Journal of Chinese Economic and Business Studies, 9(4), pp.329-347.

Gomes, E., Weber, Y. and Brown, C. (2011) Mergers, Acquisitions and Strategic Alliances: Understanding the Process. UK: Palgrave Macmillan.

Holburn, G.L. and Vanden Bergh, R.G. (2014) Integrated market and nonmarket strategies: Political campaign contributions around merger and acquisition events in the energy sector. Strategic Management Journal, 35(3), pp.450-460.

Hotten, R. (2014) Falling oil prices threaten to transform the industry. [Online]. Available at https://www.bbc.com/news/business-30393690 [Accessed: 8 July 2016].

Inkpen, A.C. and Moffett, M.H. (2011) The Global Oil & Gas Industry: Management, Strategy & Finance. UK: PennWell Books.

Lacalle, D. and Parrilla, D. (2015) The Energy World is Flat: Opportunities from the End of Peak Oil. USA: John Wiley & Sons.

Lacity, M. and Willcocks, L. (2015) Nine Keys to World-Class Business Process Outsourcing. UK: Bloomsbury Publishing.

LaMattina, J.L. (2011) The impact of mergers on pharmaceutical R&D. Nature Reviews Drug Discovery, 10(8), pp.559-560.

Rothaermel, F.T. (2015) Strategic management. USA: McGraw-Hill.

Scheck, J. and Raice, S. (2014) Will Cheap Oil Lead to Big Mergers?. [Online]. Available at https://www.wsj.com/articles/will-cheap-oil-lead-to-big-mergers-1417750974 [Accessed: 8 July 2016].

Wstenhagen, R. and Wuebker, R. eds. (2011) The Handbook of Research on Energy Entrepreneurship. USA: Edward Elgar Publishing.