Exxon and Mobil combine

Exxon and Mobil have signed an $ 81 bn deal to create the world's largest oil company.
Executives maintained that the huge size of their venture -- secretly negotiated over the past five months under the code name "Highway" -- would ensure success in an era of low oil prices and produce savings that would benefit employees and consumers.

The new company, to be named Exxon Mobil Corp., will save $ 2.8 bn in expenses over the next three years, shed at least 9,000 jobs, and turn Mobil's corporate headquarters in Fairfax into the refinery and marketing arm of a corporate empire that will stretch across about 150 countries, the companies said.
Federal and overseas regulators, who must approve the merger, may force the sale of service stations and other assets, but the company intends to keep selling under both the Exxon and Mobil brand names.

Mobil is the nation's second-largest oil company, exceeded only by Exxon, but Mobil executives found the competitive environment increasingly difficult. Mobil chief executive Lucio A. Noto said: "We tend to do smart things when times are tough. And times are tough right now."
Exxon is effectively taking over Mobil. Exxon's chief executive, Lee R. Raymond, will head the new entity while Noto, a 36-year Mobil veteran, will become vice chairman. Many senior Mobil executives will relocate to Irving, Tex., Exxon's headquarters. About 2,000 of Mobil's 42,700 employees are based in the Washington area.

The deal had its genesis on a sweltering June day when Raymond called Noto and invited him to dinner. Both companies, like the rest of the industry, were facing drops in profits as they were confronted with a steep plunge in the price of oil, which recently fell to prices not seen since the Great Depression on an inflation-adjusted basis. Noto had cut a deal combining Mobil's oil and marketing operations in Europe with BP's in 1997, and Raymond was interested in a similar alliance in the United States.
But Noto felt that another alliance was not enough to thrive. "The easy things are behind us," he said. "The easy oil, the easy cost savings, they've been done."
Indeed, even after steep job cuts and other cost-cutting measures, Exxon eked out only $ 8.46 bn in profit last year on revenue of $ 137.24 bn, a return of less than 6 %.

Raymond noted that in addition to high costs and slipping oil prices, new competition has radically changed the industry over the past 10 to 15 years, making the merger critical. International oil companies, once only involved in exploration and production, have moved into the refining end. And competition also has mushroomed on the retail end. PdVSA has the largest number of outlets in the United States.
"The biggest surprise," Raymond said, "was when we really started to look at Mobil's landscape of investments, how well they fit." The new company, for instance, will have a strong position in natural gas, a fuel that is expected to become more important in oil companies' futures because it contributes less to global warming than oil does.

The deal was officially signed at the office of investment banking house J.P. Morgan & Co., the chief adviser to Exxon. "The driving force behind this merger is long-term opportunities," said Rod Peacock, a J.P. Morgan investment banker who headed the team advising Exxon. "It is a capital-intensive industry."
Raymond said he expects to close the deal by the middle of 1999, pending approval by federal regulators. But several special-interest groups vowed to try to block the process, claiming it would concentrate too much power and pose an environmental threat.
Fred Krupp, executive director of the Environmental Defence Fund, noted that Exxon and Mobil have been key foes of efforts to cut greenhouse emissions, opposing climate-change protocol signed by more than 50 nations and supported by Shell, BP and other oil giants.

The final price will be based on the value of Exxon's stock when the deal closes next year. Exxon shareholders will own about 70 % of the company; Mobilshareholders will own the rest.
Noto said that on nine out of 10 issues, the companies are aligned. Though many analysts and oil industry experts said the Exxon and Mobil cultures are like oil and water, Raymond said their cultures are similar, particularly their shared love of intense and constant analysis.

White House Press Secretary Joe Lockhart said President Clinton generally looks favourably on mergers. "He believes that mergers that make us more globally competitive have a positive role to play as long as there is protection for consumers and it promotes economic growth," Lockhart said.

Combined, the companies will have 48,000 gas stations, many of them overlapping. John H. Lichtblau of the Petroleum Industry Research Foundation in New York is among many analysts who expect some to be shut down and even dispose of some refinery assets. Executives said the combined company will control about 13.5 % of the retail gas market in this country.