Chapter-1

Company Profiles before Merger

1.1 British Petroleum Company British Petroleum Company (BP) is a British multinational oil and gas company. It is the third-largest energy company and fourth-largest company in the world. It is vertically integrated and operates in all areas of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has renewable energy activities in biofuels and wind power. BP has operations in over 80 countries, produces around 3.4 million barrels of oil equivalent per day and has around 21,800 service stations worldwide. BP at a glance: Industry Founded Type Early Name Headquarters Products History of BP BP's origins date back to the founding of the Anglo-Persian Oil Company in 1909, established as a subsidiary of Burmah Oil Company to exploit oil discoveries in Iran. In 1935, it became the Anglo-Iranian Oil Company and in 1954 British Petroleum. In 1959, the company expanded beyond the Middle East to Alaska and in 1965 it was the first company to strike oil in the North Sea. British Petroleum acquired majority control of Standard Oil of Ohio in 1978. Formerly majority state-owned, the British government privatized the company in stages between 1979 and 1987. British Petroleum merged with Amoco in 1998. 1909 1935 1954 1998 Anglo-Persian Oil Company Anglo-Iranian Oil Company British Petroleum BP Amoco PLC Established as a subsidiary of Burmah Oil Company Renamed Renamed Merged with Amoco Oil and gas 1909 Public Limited Company Anglo-Persian Oil Company London, United Kingdom Petroleum, Natural gas, Motor fuels, Aviation fuels

1|Page

Financial Statement before Merger Condensed Consolidated Statement of Income British Petroleum Company Year Ended December 31, (millions of dollars) 1997 1996 102064 91760 91051 81605 11013 10155 1004 908 10009 9247 2755 3066 7254 6181 3008 3452 4246 2729 7.43 7.31 3.21 6.13 6.53 3.65

Revenues: Costs and Expenses Profit before interest and tax Interest expense Profit before tax Income taxes Profit after tax Distribution to shareholder Retained profit Earnings per share (EPS) Basic Diluted Dividends per share (DPS) - Cents

British Petroleum Company Condensed Consolidated Statement of Financial Position

Assets Fixed assets Stocks and debtors Cash and liquid resources Total assets Creditors and provisions excluding finance debt Capital employed Financed by: Finance debt shareholders Equity

December31 (Million $) 1997 1998 61601 65221 25134 19304 1580 1422 88315 85947 34135 54180 12848 41332 54180 30222 55725 12877 42848 55725

2|Page

1.2 Amoco Corporation Amoco Corporation, originally Standard Oil Company (Indiana), was a global chemical and oil company that was founded in 1889 around a refinery located in Whiting, Indiana, United States. It later absorbed the American Oil Company, founded in Baltimore in 1910 and incorporated in 1922 by Louis Blaustein and his son Jacob. Amoco merged with BP in December 1998 forming BP Amoco, later renamed to BP. Amoco Corporation at a glance: Industry Founded Type Headquarters Products Oil 1889 Public Limited Company Amoco Building, Chicago, Illinois, U.S. kerosene and gasoline

History of Amoco Corporation

Like most companies, Amoco started small. Unlike most companies, however, it had the backing of a big name in American industry, John D. Rockefeller. Standard Oil of Indiana, as the company was officially known for many years, took shape in 1899. Initially it consisted of a single facility outside Whiting, Indiana, which refined oil intro products that people and business needed: axle grease for industrial machinery, paraffin wax for candles, and kerosene for home lighting. The company grew. By the early 1900s it was the leading provider of kerosene and gasoline in the Midwest. Kerosene sales would eventually falter. But with car ownership booming across the United States, demand for gasoline would only go up and up. The first Amoco service station opened in Minneapolis, Minnesota, in 1912. Those were heady days for the company. Rockefellers Standard Oil Trust had been broken up the previous year, meaning that Amoco had to stand on its own feet. Two company scientists registered a patent for a process they had invented called thermal cracking. It doubled the amount of gasoline that could be made from a barrel of oil and also boosted the gasolines octane rating. The process became standard practice in the refining industry, and it was credited with averting a gasoline shortage during the First World War. In the 1920s, the company decided to secure its own sources of crude oil. It established an exploration and production business, Stanolind, with plans to look for oil mainly in the United States. In 1930 Stanolind crews found what they were looking for, striking oil at a
3|Page

large field in east Texas in 1930 .They found the Hastings field south of Houston at the end of 1934. During World War II, Amoco employees put much of their energy into providing gasoline and other products to the American military. US warplanes flew on Amoco aviation fuel. Soldiers in the trenches peeled Amoco-made paraffin seals off their food rations at mealtimes. And Amoco researchers made discoveries that had military uses, including an all-weather motor oil for trucks and tanks and a new way of making TNT. War diverted attention away from oil and gas exploration, but by the mid-1940s the company was back on the trail. Off the coast of Louisiana, Amoco explorers found the first oil out of sight of land. The following year, an exploration office opened in Canada. Its first oil was found within months. Meanwhile, Amoco scientists made a breakthrough that would boost the amount of oil and natural gas that would flow through those new wells. They introduced Hydrafrac, a hydraulic well fracturing process that increased industry production worldwide. A decade later, Amoco chemicals scientists discovered PTA, a chemical used in the production polyester fibers. To capitalize on the discovery the company opened Amoco Fabrics and Fibers. As the 20th century progressed, so did Amoco. The company that had started as a single site in Indiana had become large by any measure. By the end of the century, it was the largest natural gas producer in North America, with a reach that stretched well beyond its home continent: exploration in 20 countries, production in 14 countries. Amoco produced 13 million tonnes of chemicals a year and was the worlds largest producer of PTA. It was big in solar power, too, with a 50% stake in a leading solar company. In 1998, Amoco and BP announced that they had merged, combining their worldwide operations into a single organization. Overnight, the new company, BP Amoco, became the largest producer of both oil and natural gas in the US. 1989 1910 1998 Established as Standard Oil Company (Indiana) absorbed the American Oil Company Amoco merged with BP

4|Page

Financial Statement before Merger Amoco Company Condensed Consolidated Statement of Income Year Ended December 31, (millions of dollars) 1997 1996 Revenues: Sales and other operating revenues Consumer excise taxes Other income Total revenues Costs and Expenses: Purchased crude oil,natural gas, petroleum products and merchandise Operating expenses Petroleum exploration expenses, including exploratory dry holes Selling and administrative expenses Taxes other than income taxes Depreciation, depletion, amortization, and retirements and abandonments Interest expense: Affiliates Other Total costs and expenses Income before income taxes Income taxes Net income

$28,490 3,451 1,045 32,986

$28,669 3,386 574 32,629

15,973 4,468 529 1,823 4,141 2,043 509 265 29,751 3,235 961 $ 2,274

16,067 4,091 548 1,915 4,129 1,986 496 53 29,285 3,344 942 $ 2,402

Summarized quarterly financial data for the years ended December 31, 1997 Revenues 1997 1996 $7,153 $7,404 $7,826 $8,026 $8,299 $8,272 $9,708 $8,927 Operating Profit* 1997 1996 $ 892 $ 899 $ 916 $ 803 $ 999 $ 908 $1,013 $1,125 Net Income* 1997 1996 $ 556 $ 598 $ 546 $ 510 $ 468 $ 566 $ 704 $ 728

Quarter First Second Third Fourth

5|Page

Amoco Company Condensed Consolidated Statement of Financial Position December 31, (millions of dollars) 1997 1996 $ 78 768 3,676 876 1,044 6,442 $ 222 767 3,899 820 653 6,361

ASSETS Current Assets: Cash ................................... Marketable securities--at cost ......... Accounts and notes receivable Inventories ............................ Prepaid expenses, income taxes and other Total current assets ................. Investments and Other Assets: Affiliates ............................. Other .................................. Properties Total assets ......................... LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Current portion of long-term obligations Short-term obligations ................. Accounts payable ....................... Accrued liabilities .................... Taxes payable (including income taxes) . Total current liabilities ............ Long-Term Obligations: Affiliate debt ......................... Other debt ............................. Capitalized leases ..................... Deferred Credits and Other Non-Current Liabilities: Income taxes ........................... Other .................................. Minority Interest ...................... Shareholder's Equity ................... Total liabilities and shareholder's equity

1,391 2,957 4,348 19,272 $30,062

1,464 1,376 2,840 20,007 $29,208

$ 146 576 2,497 872 1,074 5,165

74 442 2,663 916 831 4,926

4,739 2,791 80 7,610

4,731 2,190 76 6,997

2,781 1,882 4,663 119 12,505 $30,062

2,592 1,932 4,524 131 12,630 $29,208

6|Page

Chapter-2
Completion of Merger
2.0 History Over a number of years, BP/Amoco had engaged in discussions about a joint venture involving their petrochemicals businesses. These exploratory discussions ended in February 1997 without an agreement. In May 1998, Sir John Browne, the Chief Executive of BP, met with H. Laurence Fuller of Amoco, to discuss other aspects of combining the businesses of the two companies. A month later, the financial advisors of the two companies, J.P. Morgan for BP and Morgan Stanley for Amoco, met to discuss aspects of a deal structure. A confidentiality agreement between the two companies was signed on July 24, 1998. On August 10, 1998, the two chief executives agreed on the exchange ratio and the composition of the new board. Later that day the merger was approved by the board of directors of each company. The next day, on August 11, 1998, the merger agreement was executed by the parties and the transaction was publicly announced. The merger was approved by the shareholders and became effective December 21, 1998. 2.1 Reasons behind Merger To increase complementary strategic and geographical strengths which effectively create a new super-major that can better serve our millions of customers worldwide. The companies said they expect the merger to create an additional $2 billion in annual pre-tax earnings through cost savings by the end of 2000. To reduce the intensity of competition between two companies. To adjust with the global price reduction of gas and oil Concentration in the world oil industry To adopt with Technological change To use the opportunity of Globalization and freer trade To decrease the Industry instability To reduce Pressures for economies of scale, scope, and complementarities Rising stock prices, low interest rates, strong economic growth

7|Page

2.2 Transaction summary a) Merger of Amoco into a newly formed BP first-tier US subsidiary b) Amoco shareholders receive BP plc ordinary shares as ADRs c) Unified global management team d) US and UK GAAP results presented using merger accounting or on a "pooling of interest" basis e) US$-denominated group financials and dividends f) Transaction recommended by both Boards g) Effective: December 31, 1998

2.3 Exchange Share prices 1 day before the merger announcement were $76 for BP and $41 for Amoco. Shares outstanding for BP were 976 million and 954.2 million for Amoco. The pre-merger total market values were, therefore, $74.2 billion for BP and $39.1 billion for Amoco, for a total of $113.3 billion. Thus, the BP market cap was 65.5 percent of the total. The exchange terms were 0.66/share of BP for one share of Amoco. Thus, the post-merger number of shares remained the same for BP, but declined to 629.8 for Amoco. The new total number of shares became 1,605.8 million. The ownership shares of the BP shareholders became 60.8 percent versus 39.2 percent for Amoco. This shows that a stock-for-stock merger has a major impact on the relative ownership in the new firm. The terms of the deal are of critical importance for the real cost to the original owners of each firm. Other aspects of the transaction are shown in Table 6. Their respective book values as of June 30, 1998 were $24 billion and $15.7 billion. The market-to-book ratio was 3.1 for BP and 2.5 for Amoco. The last 12 months' (LTM) net income for the two companies was about $4 billion for BP and about $2 billion for Amoco.

8|Page

2.4 Structure of post-merger UK Holding Company Structure Amoco shareholders exchanged their shares in Amoco for ADRs representing shares in BP

3.5 Terms and Conditions Accounting/reporting o Accounted for as a merger under UK GAAP (or "pooling" under US GAAP) o BP to report in US dollars, under UK GAAP with supplementary US GAAP information provided Dividends o Dividends to be declared in dollars, with a sterling alternative to be offered to all UK shareholders of BP who require Sterling Listing/index o BP Amoco remains in the FTSE 100 index o FTSE weighting increased

9|Page

Chapter-3
Premium, Synergy, and Challenges of merger
3.1 Premium The exchange terms were 0.66/share of BP for one share of Amoco. Thus, the post-merger number of shares remained the same for BP, but declined to 629.8 for Amoco. The new total number of shares became 1,605.8 million. The ownership shares of the BP shareholders became 60.8 percent versus 39.2 percent for Amoco.

3.2 Synergy We can calculate synergy from and premium for merger by the following methods a) Dividend Discount Model: Amoco Corporation Net income after tax No of outstanding Share EPS DPS 1997 $ 2,402,000,000 954200000 2.52 1.08

Retention Rate,1997=(1-Dividend Payout Ratio) = {1-(DPSEPS)} = {1-(1.082.52)} = 0.804

10 | P a g e

Return On Equity,1997=(.10+.13+.14+.10+.12+.11+.11+.16+.15+.13+.09)11 =0.12

Growth Rate, G=Retention Rate Return On Equity = 0.8040.12 = 0.0965

Required Rate of Return = 15.21%

D0 (1 g ) kg

P0

1.23(1 0.0965) 0.1213 0.0965

=$47.75 So, the intrinsic value of Amocoss share price is 19.68 under dividend discount model. Value of Amoco = =47.75 Value of BP British Petroleum Corporation Net income after tax No of outstanding Share EPS DPS 1997 $ 7254000000 976000000 7.43 3.21

Retention Rate,1997=(1-Dividend Payout Ratio) = {1-(DPSEPS)} = {1-(3.217.43)} = 0.57

11 | P a g e

Return On Equity,1997=(.10+.13+.14+.10+.12+.11+.11+.16+.15+.13+.09)11 =0.135

Growth Rate, G=Retention Rate Return On Equity = 0.570.135 = 0.0767

Required Rate of Return = 13.5%

D0 (1 g ) kg

P0

3.21(1 0.0767) 0.135 0.0767

=$47.15 So, the intrinsic value of BPs share price is 19.68 under dividend discount model. Value of Amoco = =47.75 Combined Value of BP-Amoco =Value of Amoco + value of BP + Synergy =45.56+46.02+(2/.123) =107.84 billion % of ownership of Amoco after merger=39.2% Cost of Merger = Combined value % of ownership =107.84 39.2% =42.27 billion Economic Value Added (EVA) = Combined Value Value of BP-Cost of Acquisition =107.84 46.02 42.27 =$ 19.54 billion

12 | P a g e

3.3 Financial Condition After merger The foregoing dilution and accretion analysis assumes no synergies. However, in the proxy sent to shareholders of each of the companies dated October 30, 1998, some estimates of synergies are presented. It was stated that the combination of the two companies will achieve ``increased opportunities.'' The proxy statement also states that a cost savings of $2 billion per year would be achieved. The estimated cost savings, which are in addition to cost savings previously targeted by the two companies separately, are expected to come from staff reductions in areas of overlap, more focused exploration efforts, standardization and simplification of business processes, improved procurement and the elimination of duplicative facilities.

3.4 Estimated Synergy & its impact We do not know the exact dollar value of synergy. We can represent projected dollar value of synergy and its impact on the EPS of both companies- Amoco and BP.

13 | P a g e

3.5 Challenges of merger As BP and Amoco prepared to merge, early decisions about future strategy, organization and products were necessary to satisfy future stakeholders: Employees requested certainty about the future of their jobs Suppliers required certainty about their future role Customers required delivery assurance Shareholders demanded economic growth BP and Amoco shared a market space, but their operational and financial processes possessed inherent dissimilarities. Preparing to identify and analyze the common synergies between these two companies presented a large data collection, analysis and tracking problem. BP and Amoco needed to streamline their merger integration process and close the merger quickly.

14 | P a g e

Conclusion The BP/Amoco merger was the biggest horizontal merger in the oil and gas industry which affect the price of oil and gas globally. The BP/Amoco merger has been described within the framework of the broader forces operating in the oil industry. Particularly, oil price instabilities and the continuing uncertainties of the industry are shown to have influenced management strategies and policies. Based on the evidence available to date, the BP/Amoco merger appears to have a valid basis in business economics and financial analysis. By acquiring Amoco, BP has

15 | P a g e

Bibliography

Person
Muhammad Salauddin Chowdhury, ACA Assistant Professor, Department of Finance, Faculty of Business Studies, University of Dhaka

Website
http://www.bp.com www.catalogue.nla.gov.au www.google.brand.edgar-online.com
www.en.wikipedia.org

Books
Corporate Finance, 7th Edition By Stephen A. Ross, R. W. Westerfield, Jeffrey Jaffe

16 | P a g e