Exxon Mobil - Merger - Synergy

Synergy

The motivations for the Exxon-Mobil merger reflected the industry forces. Companies needed a secure presence in the regions with high potential for oil/gas discoveries and stronger position to make large investments. The benefits of the merger fell broadly in two categories: near-term operating synergies and capital productivity improvements.

Near-term operating synergies. $2.8 billion in annual pre-tax benefits from operating synergies (increases in production, sales and efficiency, decreases in unit costs and combining complementary operations). Management expected to realize the full benefits by the third year after the merger. During the first two years, the benefits should have been partly offset by one-time costs at $2 billion for business integration. The firms also planned to eliminate about 9,000 jobs. A year later, pre-tax annual savings were re-assessed and increased to $3.8 billion.

Capital productivity improvements. Management also believed the combined company could use its capital more profitably than either company on its own. These improvements were realized due to efficiencies of scale, cost savings, and sharing of best management practices. The businesses and assets of Exxon and Mobil were highly complementary in key areas. In the exploration and production area, for example, Mobil's and Exxon's respective strengths in West Africa, the Caspian region, Russia, South America, and North America lined up well, with minimal overlap. The firms also had a presence in natural gas, with combined sales of about 14 bcfd. And Mobil contributed its LNG assets and experience to the venture.

There were technology synergies as well. In upstream, Exxon and Mobil owned proprietary technologies in the areas of: deepwater and arctic operations, heavy oil, gas-to-liquids processing, LNG, and high-strength steel. In downstream, their proprietary technology focused on refining and chemical catalysts. Exxon’s lube base stocks production fitted well with Mobil's leadership in lubes marketing. Generally, the Exxon-Mobil deal was a move by the dominant partner to increase its asset base by 30% while raising capital productivity.