Discuss both the attractions and disadvantages of BP as a possible take-over target, and identify the most probable bidders for BP.
Give some examples of the problems that face these potential bidders in terms of political issues and managerial styles. Discuss whether a continuation of low oil prices, as seen in the first quarter of 2015, will accelerate any take-over bid, or would low prices be another barrier.
BP is an Anglo Persian oil company and was a member of ‘Seven Sisters’, entered into the market in 1970. In 2010, BP was hit by Gulf of Mexico oil that was a biggest oil spill in the history of U.S., and it caused financial damage to BP worth $42 billion. So BP is suffering from the financial crisis as well as reduced share prices that affect profits of many oil-field-service providers. So many companies like Exxon, PLC approached BP for a takeover as its share prices fall in the market, but they face many obstacles like political issues and managerial problems. Government of UK wants Oil company to remain an entity of British and wants to make it major global company in the region. BP has a capitalization of the market of more than $130 billion. The main concern is on the range of UK businesses and on its success that comes through healthy competition in the market. Except these political issues Exxon, PLC face many managerial problems as there is uncertainty regarding the penalty on BP. When there is a drop in oil price, oil field services companies get squeezed as it is not economical to extract oil from the ground. Drilling contracts and oil exploration are likely to be canceled and to be put on hold. Due to the lower price of oil, insolvency filing in the gas and oil sector is expected to rise. So when oil prices fall due to the Gulf of Mexico, history points to mergers and acquisitions of the energy industry (Wilkinson, 2015).
BP takes over by Exxon have some advantage. The American business by Exxon is smaller than the international. And also BP is strongest in America. The advantage of taking over BP is that Exxon has low borrowed cost and has a high amount of cash. They also did a good job of absorbing Mobil. The next attraction of BP is that 20% share has the best oil company. In Russia, oil and gas have a huge market, and BP made a lot of money from the Russia. BP wants to stay in the market ( Shuen, et al.2014). Also, Exxon can solve any problem in the BP. They built the BP in the high range. BP doesn’t spend so much capital as fast as possible that expected. BP maintains their position and maintains their rate in the international market.
BP has many disadvantages. If the penalty is created on BP, then they will face the burden of the liabilities. Also, the size of the company is too large than required. This is the wastage of money. For that place, they give interest. So many companies find bidding for BP is risky as US government charges penalty to BP. An continue drop in the share price of BP may bring huge liabilities to the company and bring uncertainty in future profits of competitors of BP ( Ingraffea, et al.2014)..
They also not export their technology for that they did not earn money. The following disadvantages are-
It is very costly for high legal expenses. Also the cost of acquiring the new company also very high for the short time. This mergers and acquisition corporate decision is most complex, and it may create the problem (Andersen, 2015, December). The acquisition process is expensive for legal procedure, the cost of taking over the company, short time opportunity, etc.
In some of the case not only acquisition problem but also have some problem in shareholders and consumer also. The consumers are not satisfied financially. These drawbacks are increased the consumer cost, decrease the performance in corporate, etc. share also has many disadvantages in the leadership section. They reduce the takeover activity and them also unable to produce power influence in the-the corporate section. The company also suffers from the lower cost of the share. The Lower price of the share creates disadvantage in the short term company (Thurner, and Proskuryakova, 2014).
Another problem is the fewer wages of the employee. For this case overpay the other employee and increase the wages. This is the unsettle the budget of the company (Saad, et al.2014).
There are also having some disadvantages for taking over the company. That is fine, damage, and compensation. For this case the cost of BP is over. It also has political risk. Exxon can take over the company, but it has some political risk.
In the oil industry, the important bidders are Royal Dutch Shell. Also, the most company in UK are bidder of the BP. Also chevron corp. The largest U.S. company bidders of the BP. Some British company also co-operate with the BP. Mexico Oil Company also help to the BP.
In 2010 BP was hit by Gulf of Mexico oil that was a biggest oil spill in history of U.S. and it caused a financial damage to BP worth $42 billion. Many economists speculated about the major challenge that that the company could face is a takeover by its foreign competitors like Shell, Exxon. Exxon Mobil Corporation was expected to approach BP in this regard (Watson, et al.2015, July).
In 2010, BP was hit by Gulf of Mexico oil that was a biggest oil spill in the history of U.S., and it caused financial damage to BP worth $42 billion. Many economists speculated about the major challenge that that the company could face a takeover by its foreign competitors likes Shell, Exxon. Exxon Mobil Corporation was expected to approach BP in this regard (Le and Chang, 2015). Exxon has the financial capacity to take over BP but whether Exxon intends to go further with the takeover is the main concern (Ritchie, Gill and Picou, 2011).
They face many obstacle to the takeover of BP like political issues and managerial obstacles. If this competitor of BP wants to buy bulk amount shares from BP, then companies have to face some risks associated with liabilities and constraints from the government of UK.
Government of UK wants Oil company to remain an entity of British and wants to make it major global company in the region. The earlier prime minister of UK has welcomed foreign direct investment at a large pace in this region. So it is very clear that government of UK would intervene if any foreign oil company like Exxon wants to target BP.
This type of takeover may bring a threat to the financial and national security of any country so if Government of UK finds any risk, in this case, it can intervene and partially brings constraints in bidding.
BP has a capitalization of the market of more than $130 billion, so it is an attractive takeover decision for Exxon, but it has reservation regarding obtaining of the UK based company. As a result, it would be expected to face a political obstacle in the initial phase.
After the bid of 60 billion pounds by Pfizer Inc. for AstraZeneca plc government of UK took strict measures that caused public, business, and political concerns.
The main concern is on the range of UK businesses and on its success that comes through healthy competition in the market. UK government is interested in having British companies succeeding and competing at both abroad and home.
On the other hand, its competitor like Royal Dutch Shell, Exxon Mobil Corp, and PLC have faced trouble in gaining profits on US shale as these companies struggled with higher costs on expensive projects. BP faced many political problems in Russia and US.
So many companies find acquisition for BP is risky as US government charges the penalty to BP. A continued drop in the share price of BP may bring huge liabilities to the company and bring uncertainty in future profits of competitors of BP (Le and Chang, 2015).
Another cost associated with this takeover is the cost of cleaning the sea that creates a huge burden on the Exxon, PLC, etc.
Except these political issues Exxon, PLC face many managerial problems as there is uncertainty regarding the penalty on BP. CEO of Exxon has explained that merging of these two companies is complicated because of the procedure applied to that company. Further, he explained that this may lead to the disaster that happened in 2010.
Jeff Woodbury, head of investor relations, said that it is good to pursue with those acquisitions that are accretive to long run returns and have strategic values. So the advantages of this merger depend on the relationships and price of market shares and the position of the portfolio. It was predicted by some experts that Shell tried to make takeover bid for BP, but the argument was, BP was in weak financial position with the financial effect of the Deepwater Horizon disaster was not solved.
As BP was banned in US market so it should be taken into consideration that acquisition also brings liabilities with it. So any company that wants to buy shares of BP must think about this profitability aspect.
Besides this, Exxon faced many cultural challenges that affect the takeover decision.
According to London Stock Exchange, a share price of BP declined to 365 pence and the company that is listed on the London Stock Exchange emphasized a warning declared by oil and gas UK. The issue is not to produce with the lower oil prices due to the high production costs (Platformlondon.org, 2015).
When there is a drop in oil price, oil field services companies get squeezed as it is not economical to extract oil from the ground. Oil exploration companies could not meet the cost of production anymore, and there is no need to pay an oilfield service companies. As a result, the oil producing companies can feel the effects of the low oil prices. So production and exploration companies stop and slow drilling as they could not make money. There is huge pressure on oil services providers, and this leads to the variety of disputes. This reduced oil price has serious effects on the gas and oil companies all over the world. These problems are
Drilling contracts and oil exploration are likely to be canceled and to be put on hold. Explorations companies reduce its investments as the number of gas and oil rigs in operation begin to drop. Offshore oil companies are more affected then the exploration companies of oil, indicating that when drilling stops and slows profits are mostly affected (Moshiri, 2015).
It is better for many oil companies to divert its cargoes that are subject to constraints in supply agreements.
Due to the lower price of oil, insolvency filing in the gas and oil sector is expected to rise. Oil companies are demanding 20% fall in price and extension of payment periods that creates cash flow gaps for companies. Drilling firms and oil service providers may have ineffective balance sheets. Insolvency in oil sectors experiences a knock on the impact that leads to the financial loss for their contract parties (The Independent, 2015).
Ensuring insolvencies, squeezed profits and consolidations result in redundancies across the gas and oil industry and this cause unemployment problem in the economy (Kang, Penn and Zietz, 2013). These employment disputes create additional costs to employers. Shell plans to cut jobs and plans to shift in the North Sea to get the impact of reducing oil prices (Le and Chang, 2015).
So when oil prices fall due to the Gulf of Mexico, history points to mergers and acquisitions of the energy industry. Price crashes in the 90s led the big firms to take over smaller companies and so investors and bankers are hoping the same thing after a decline in the oil price in recent days. The oil-field –service-providers suffer most when the oil price falls as it reduces the oil company spending. Pascal Menges explained that there will be assets sales and an uptick in acquisitions if the price of oil falls continuously. This lower oil price may bring the distressed situation to small and medium size firms that force to unload property or sell out totally. Falling oil price not only harms producers but also harms consumers as it increases total expenditure cost of them (Susskind et al., 2015).
Deep price fall in the late 90s led to an integration of oil producing firms and refining firms and a consolidation of the big giants. The recent decline in oil prices not only brings fewer profits but also it brings the fear that it could breach its debt covenants. So it inevitable to face loss in production when the oil price falls at a larger pace. As a result, BP faces some uncertainty and inconvenience due to a higher cost of production. Many competitors of BP try to take over BP, but they face many problems that restrict the takeover process.
References
Bugeja, M., da Silva Rosa, R., Izan, H. and Ngan, S. (2015). To scheme or bid? Choice of takeover method and impact on premium. Australian Journal of Management.
Bugeja, M., da Silva Rosa, R., Izan, H. and Ngan, S. (2015). To scheme or bid? Choice of takeover method and impact on premium. Australian Journal of Management.
Kang, W., Penn, D. and Zietz, J. (2013). The response of state employment to oil price volatility. Journal of Economics and Finance, 39(3), pp.478-500.
Le, T. and Chang, Y. (2015). Effects of oil price shocks on the stock market performance: do nature of shocks and economies matter?. Energy Economics.
Moshiri, S. (2015). Asymmetric effects of oil price shocks in oil-exporting countries: the role of institutions. OPEC Energy Review, 39(2), pp.222-246.
Platformlondon.org, (2015). Share price of BP falling – will Shell take over BP?. [online] Available at: https://platformlondon.org/2015/01/12/shareprice-of-bp-falling-will-shell-to-take-over-bp/ [Accessed 5 Aug. 2015].
Ritchie, L., Gill, D. and Picou, J. (2011). The BP Disaster as an Exxon Valdez Rerun. Contexts, 10(3), pp.30-35.
Susskind, A., Bonn, M., Lawrence, B. and Furr, H. (2015). Regional Contrasts in Consumers’ Attitudes and Behavior Following the BP Oil Spill. Cornell Hospitality Quarterly.
Uwubanmwen, A. and Omorokunwa, O. (2015). Oil Price Volatility and Stock Price Volatility: Evidence from Nigeria. AJIS.
Wilkinson, A. (2015). Deepwater Horizon oil spill linked to Gulf of Mexico dolphin deaths. Nature.
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