28 Pages Posted: 21 Oct 2008
This case is one of a pair of cases used in a merger negotiation. It is designed to be used with “British Petroleum, Ltd.” (UVA-F-1263). One-half of the class prepares only the British Petroleum (BP) case, and one-half uses this case. BP and Amoco are considering a merger, and are in the process of negotiating a merger agreement. Macroeconomic assumptions, particularly forecasting future oil prices in an uncertain environment, and assumptions about Amoco's ability to reduce exploration and production costs make Amoco's future cash flows difficult to predict.
The day of combination is here to stay. Individualism has gone, never to return.
—John D. Rockefeller Sr.
The irony of the situation in August 1998 was not lost on H. Laurance Fuller, chair and chief executive officer (CEO) of Amoco Corporation. The agreement to the pending merger proposal from British Petroleum (BP) would begin to reassemble the former Rockefeller empire broken up in the landmark “trust bust” case of 1911. At that time, the Rockefeller holdings were carved into 33 new public companies, which included Standard Oil of New Jersey (Exxon), New York (Mobil), California (Chevron), Indiana (Amoco), Ohio (Sohio), Continental Oil (Conoco), and Atlantic Refining (ARCO). BP had previously acquired Sohio in 1988. Where only recently size was seen as an impediment to good performance, both Amoco's and BP's management had entered negotiations in the belief that increased size would enhance their competitive position. A year and a half earlier, Sir John Browne, BP's group chief executive, entertained thoughts of combining with Amoco's petrochemical division, but, uncertain of the benefits, he backed away. Now he renewed his interest in Amoco Corporation, convinced that the creation of a “supermajor” and a new platform for growth was the next frontier for BP. Since the late 1980s, however, there had been few large mergers in the oil industry—certainly nothing approaching the scale contemplated by a combination of Amoco and BP. Moreover, the industry had experienced considerable downsizing in the 1980s and early 1990s in response to perceived problems of overcapacity. Now it would take a concerted effort to convince shareholders that bigger was better, when most of the past decade had featured fervent cost-cutting orientation.
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Keywords: mergers acquisitions bargaining negotiation valuation
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