“To have lunch with you,” he was told.
On June 16, 1998, over the meal at Mobil’s headquarters in Fairfax, Virginia, Raymond turned to the immeadiate subject of the joint venture they shared with a Japanese company. Eventually they got to the subject of combining their own companies. They concluded that three questions would have to be answered in the affirmative: First, could they work out a satisfactory deal? Second, would such a deal win the approval of the Federal Trade Commission in the United States and the competition directorate at the European Union in Brussels? The third was the most daunting: “Were we wise enough to mold one organization out of two businesses?” A number of closely held conversations followed. But it became apparent that the two companies were far apart on the all-important question of valuation; that is, on what premium would be paid to Mobil shareholders. The discussions petered out. On August 6, Noto told the Mobil board the he and Raymond “had mutually agreed to discontinue discussions.”
Five days later, BP and Amoco announced their merger.
As soon as Raymond heard the news, he placed that call to Noto from Gleneagles. The valuations in the BP-Amoco deal provided an external yardstick for resolving their differences on the relative prices of Exxon and Mobil shares.
“Your neighbor just sold his house,” is the way Raymond put it. “And now we have another benchmark for what houses are selling for.”
The two companies quickly moved into overdrive on negotiating what was code-named “Project Highway.” A key decision was to create a wholly new structure so that it would be a new company for everybody.
Antitrust was a major concern. BP’s combining with Amoco was one thing. Exxon and Mobil was quite another: it would be a much bigger company, and it would bring together the two largest companies to have emerged from the 1911 breakup of the Standard Oil Trust, which meant it would be a very big news story—and a much bigger subject for regulators.
Noto was deeply worried about the impact on Mobil if they tried to do a merger and it failed because of rejection by the Federal Trade Commission. “Exxon would be okay,” said Noto, “but we would be dead meat.”
But Raymond reassured him. “This merger is going to happen,” said Raymond. “Come hell or high water.”
There was an unwritten understanding within the fraternity of antitrust lawyers that 15 percent of the total U.S. gasoline market was the limit that the FTC would allow for any combination, and this deal would fall below that line.
But what immediately preoccupied the two sides was the third question—getting to a valuation and then figuring out who would own what share. Months of hard negotiation followed, often conducted by Raymond and Noto with just a couple of aides. Finally, on the evening of November 30, the two CEOs came to agreement: Exxon would account for 80 percent of the new company, and Mobil, 20 percent. (This proportion was remarkably similar to their relative proportions in the original breakup of the Standard Oil Trust in 1911.) Mobil’s shareholders would get about a 20 percent premium on their stock. The negotiations were very intense; indeed, so intense that the final valuation on a share of stock went out to six decimal places.
On December 1, 1998, even before the FTC had ruled on the BP-Amoco deal, Exxon and Mobil announced their intention to merge. It was a very big deal. “The New Oil Behemoth,” headlined the New York Times.
At the huge press conference presenting the deal, Noto was asked if it was true that, prior to this deal, there had been discussions with BP and other companies. Noto looked out on the audience with what seemed a very long pause.
“I’ll tell you what my mother told me,” he said. “That you never talk about your old flames on the day you announce your engagement.”
The room erupted in laughter. In general, the managements of the two companies were prepared for just about every question during the press conference—except for one. What would happen, Raymond was asked, to Mobil’s longtime support of Masterpiece Theater on Friday nights on PBS? He uncharacteristically fumbled for an answer.
At another press conference a few hours later, he was asked the same question. This time he answered with a strong affirmation about continuing the commitment. As a follow-up, he was asked what had changed since the previous press conference.
“I talked to my wife,” Raymond said.10
THE GHOST OF JOHN D. ROCKEFELLER
But there remained a huge potential barrier to these deals, and that was the U.S. government—specifically the Federal Trade Commission, which would rule whether they violated antitrust laws. The spirits of John D. Rockefeller and the 1911 U.S. Supreme Court hovered over the consolidations that were transforming the industry, but the world had changed enormously in the years since.
The FTC’s focus was predominantly on refining and the networks of gasoline stations and whether any of the companies would have undue market power, which meant the ability to control the price, in the words of the FTC, “even a small amount.” What was of “intense interest” to the regulators was pricing in the downstream—that is, the cost of fuel coming out of the refineries and gasoline at the pump.11
But the central rationale of these deals was not about refining and marketing—the downstream—in the United States. It was about the global upstream—exploration and production of oil and gas around the world. The companies were seeking efficiency and cost reduction—the ability to spread costs over a larger number of barrels. No less important was the quest for scale—the ability to take on larger and more complex projects (Lou Noto’s “six projects in the frying pan”)—and the ability to mobilize the money, people, and technology to execute those projects. Also, the bigger and more diversified the company, the less vulnerable it was to political upheavals in any country. Such a company could take on more and bigger projects. It was already clear that projects themselves were getting larger. A megaproject in the 1990s might cost $500 million. In the decade that was coming, they would be $5 billion or $10 billion or even more. The BP-Amoco deal sailed through the FTC in a matter of months with only minor requirements for divestiture. But Exxon-Mobil was of entirely different scale—much larger. And just to mention together the names of the two largest legatees of the original Standard Oil Trust seemed enough to evoke the ghost of John D. Rockefeller.
The FTC launched an enormous probe into the proposed merger, in cooperation with twenty-one state attorneys general and the European Union’s competition directorate. As part of its investigation, the FTC mandated the largest disclosure project in history, which altogether required millions of pages of documents from the two companies from operations all over the world, ranging from refinery operations in the United States to a decade’s worth of documents on all lubricant sales in Indonesia. It took almost a year, but finally the FTC came to its decision. In order for Exxon and Mobil to merge, they had to divest 2,431 gasoline stations, out of a total of about 16,000, and one oil refinery in California, plus a few other things. But to those who feared the reincarnation of John D. Rockefeller, the FTC replied that this was not 1911 but rather a very different world. The Standard Oil Trust, explained FTC chairman Robert Pitofsky, “had 90 percent of the U.S. market, while this company after the merger will have about 12 or 13 percent”—below that unstated 15 percent limit. On November 30, 1999, ExxonMobil came into existence as one company.
But at the same time, Pitofsky sent out a warning: a high degree of market concentration would “set off antitrust alarms.”12
THE ALARMS
Those “antitrust alarms” had already been set off by BP’s bid for ARCO. BP-Amoco had moved very fast with its ARCO deal—too fast for the FTC, as it turned out. After a heated internal debate, the commission, by a 3-to-2 vote, decided that the absorption of ARCO would enable BP to manipulate the price of Alaskan oil sold into the West Coast and keep “prices high.” What did “high” mean? According to the mathematics of the FTC’s witness, a combined company would have been able to increase the price of gasoline by about half a cent a gallon for a few years.<
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In the view of the majority at the FTC, BP had overreached, and before it could close the deal, it would be required to divest the premier asset, the crown jewel, the whole reason that it had wanted ARCO in the first place—the North Slope oil. A chastened BP realized that it had no choice. It proceeded to close the deal in April 2000, but without the North Slope.
The director of the FTC’s Bureau of Economics, writing afterward about the deal, offered a considered judgment that extended to the other mergers of the era: “It is fair to say that in each of these cases, the companies agreed to divestitures that went well beyond what many believed were necessary to protect competition.” But politics, the inherent suspicion of the oil industry, and the sense that the mergers were coming too fast—all these were decisive factors. 13
THE FRENCH RECONNECTION : TOTAL AND ELF
Not everyone depended upon the approval of the Federal Trade Commission. In France, what counted was the assent of the prime minister.
France had two major oil companies, Total and Elf, both of which had been state controlled but were now fully privatized. The reason for the two companies was, as Thierry Desmarest, then Total’s CEO, put it, a “historical accident.” After World War II, France’s president, General Charles de Gaulle, was intent on restoring French “grandeur.” He decided that Total, or CFP, as it was known at the time, was “too close to the American and British companies,” and he orchestrated the creation of a second French company, a new national champion, which eventually became Elf.
“We were already convinced at the time of the BP-Amoco deal of the need to grow through consolidation,” recalled Total’s Desmarest. When we heard about the BP-Amoco deal, it confirmed for us intellectually that we had to consolidate, that we had to grow.”
The first step, at the end of 1998, was to acquire the Belgian oil company Petrofina, which was primarily a European downstream company. By June 1999, Total had worked out a takeover plan for its main target, Elf. By Friday lunchtime, on July 2, a few senior Elf executives were hearing worrying rumors that Total was about to move.
But nothing could happen without the advance approval of the government. Although Elf had been privatized in 1986, the government still held what was called a “golden share,” which gave it a veto over any change of control. Even if there had been no golden share, for a French company to proceed without a green light from the French government would have been career destroying for the managements involved.
The first person who needed to be convinced was Dominique Strauss-Kahn, the finance minister. An economist by profession, Strauss-Kahn quickly understood the competitive economic imperatives of consolidation. Worse, if the French companies did not merge, one of them might well be absorbed by a non-French company, which would be “un suicide politique” for any government that allowed it to happen.
The French prime minister, Lionel Jospin, was another matter. A onetime Trotskyite and one of the founders of the modern French Socialist Party, he was not at all familiar with the oil business and its circumstances. It was made clear to Desmarest that he would personally have to make the case to the prime minister about “the importance to France” of a merger.
Time was very short, as Total was on the very eve of launching its takeover bid. But the prime minister was in Moscow.
On Friday evening, Desmarest flew to Moscow and went directly to the National Hotel, opposite the Kremlin, for a middle-of-the-night meeting with the prime minister and Finance Minister Strauss-Kahn. Desmarest set about explaining the urgency, given what was happening with BP and Amoco, and Exxon and Mobil, and with the national oil companies. “Isn’t this just a matter of the egos of the CEOs?” asked the prime minister. Desmarest was prepared to answer the question. But under the circumstances, he judged it wiser to leave that particular answer to Strauss-Kahn. The finance minister, a former economics professor, gave the prime minister a short and persuasive lecture on the economic reality and global competitive dynamics that made a deal essential for French national interest. The French prime minister absorbed the lesson. He gave the requisite green light.
By Saturday morning, Desmarest was back in Paris, where the team was putting the last touches on the offer. On Monday, Total launched its takeover bid for Elf. The Elf CEO, Philippe Jaffré, was shocked. Elf mounted a counteroffer ; it would take over Total.
In the war for shareholder support, the battle was on. Despite the bitter accusations back and forth, the two sides were privately exchanging plans, since it was foreordained that there would be a merger, and a single French company would emerge out of the struggle. With that in mind, Desmarest and Jaffré worked out a private understanding: neither would personally attack the other publicly, since one of them would actually have to run the combined company.
In September 1999 the deal was done. TotalFina took over Elf, and Desmarest became CEO of the combined company. After a short while, TotalFinaElf would come to be known simply as Total, one of the world’s supermajors.14
“WE HAD TO CONSOLIDATE”: CHEVRON AND TEXACO
For Chevron, the former Standard of California and the nation’s third-largest oil company, it was the Exxon-Mobil merger that had really galvanized action. “ What surprised me of all of the deals was Mobil’s selling themselves to Exxon,” said David O’Reilly, who would later become CEO of Chevron. “I thought of Mobil as a sizable company, with a good portfolio, and good growth prospects.”
For Chevron, the obvious partner was Texaco, with which it shared the Caltex joint ventures—oil production in Indonesia, refining and marketing throughout Asia, now the fastest-growing market in the world. These joint ventures were five decades old and considered among the most successful such operations involving any kind of companies in the world.
A merger made the same sense to Texaco. The larger companies, the supermajors, would indeed have a higher stock market valuation than the traditional majors. In the spring of 1999, Texaco reached out to Chevron.
The companies secretly dispatched teams to rendezvous in Scottsdale, Arizona. After several days, they concluded that the fit would be excellent. But this would be no merger of equals. Texaco had gone through difficult times. It had lost a $3 billion lawsuit to an independent oil company, Pennzoil, and then, to fend off a hostile takeover from the financier Carl Icahn, it had taken on billions more in debt. As a result, it had to sell its Canadian subsidiary and slash its exploration budget, which would have painful consequences. “It’s a pretty simple rule,” said William Wicker, then CFO of Texaco. “If you cut your exploration budget in Year Zero, you’re not growing in Year Seven and Eight.” Texaco had just started to invest again, but the impact would be years away. Texaco was still a very big company, but Chevron was nearly twice as large and would be the acquirer.
While there was a good fit between the companies, the same could hardly be said of the two CEOs, Chevron’s Kenneth Derr and Texaco’s Peter Bijur. At best, the relationship between them was frosty. Moreover, the two sides could not agree on price, and the discussions broke down. Texaco, Bijur said, was developing a strategy that would get back on a solid growth course.
In the autumn of 1999, Derr retired. The new CEO, David O’Reilly, had been hired by Chevron many years earlier directly out of University College, Dublin, and was immediately dispatched to its Richmond, California, refinery. Now, as CEO, he devoted his first strategy meeting to relaunching a merger plan. “I had already known,” recalled O’Reilly, “that we had to consolidate because otherwise we’d become less relevant and marginalized compared with the competition. You have to be committed and have the stomach to go after assets even in lean times.”
O’Reilly asked for his board’s authorization to pursue a merger. The board’s reply was pretty clear: Yes. And the sooner the better.
Over the years, O’Reilly had become known for his unusual ability to connect with all sorts of people. Now his immediate job was to reconnect with Peter Bijur, the Texaco CEO. The senior managements of the two companies
met in San Francisco in May 2000 to review their two Caltex joint ventures in Asia. It was clear that the joint venture structure was a very inefficient way to run such an important—and growing—business in the most dynamic growth region in the world. They needed to change it. At the end of the meeting, O’Reilly suggested to Bijur that they talk privately and then brought up the subject of a merger. Bijur allowed that Texaco’s go-it-alone strategy was going to be hard going in the new business environment. Negotiations were reopened. The Chevron-Texaco merger was finally signed in October 2000. As Bijur somewhat ruefully summed it up, “It’s apparent that scale and size are important as the supermajor oil companies have come on the scene.”15
THE LAST ONES STANDING: CONOCO AND PHILLIPS
The FTC decision in the spring of 2000, forcing BP to divest ARCO’s North Slope assets, inadvertently helped foster the last major merger in the United States. On one side was Phillips Petroleum. Headquartered in Bartlesville, Oklahoma, Phillips was regarded as a mini-major. On the other side was Conoco, which had been owned by the DuPont chemical company since 1981. DuPont had constrained Conoco’s spending and growth, using the profits from oil and gas to build up its life-sciences business. When Archie Dunham became CEO in 1996, he later said, “My number one objective was to free the company from DuPont.” He convinced DuPont that liberating Conoco would be a very good deal for DuPont’s shareholders. On Mother’s Day, May 11, 1998, DuPont announced that it would begin selling off the company.
When the first 20 percent was sold, it constituted the largest IPO in U.S. history until that point. The company took as its mantra “Think big and move fast.” It celebrated the efficiencies that came from being nimble and keeping a direct “line of sight” from top management down into the front line of operations—not possible in a company with the scale of a supermajor. Its television commercials featured agile, nimble cats, which was said to be irritating to the much bigger Exxon, whose own emblem was a tiger.
The Quest: Energy, Security, and the Remaking of the Modern World Page 12