Explanation of the merger and acquisition deal in the energy sector during 2014-2016 through academic model

Describe about the Strategic Management for Acquisitions and Strategic Alliances.

Oil is an important factor for the energy sector. The fall in the price of oil will create a lower level of profit and spending for the projects. The energy companies they try to maintain a balance. The effect is not only on the energy industry but consequently on the other industries as well. The drop in the oil price was quite huge. The price of a barrel was 100 dollar per barrel for West Texas Intermediate (WTI) during first 8months of 2014 and it was 50 dollar a barrel in the month of March 2015. This fall in the price of oil and natural gas means there lower usage of the drilling rigs in the US.  The number declined from 980 in the last quarter to of 2014 to 954 in the mid April 2015 ( Lv and Spigarelli 2015). The number is likely to decline as the number the rigs are stacked in 2015 once the drilling commitment is completed. This is the reason why the oil producing countries has reduced their expenditure in the planned explorations (Hess and Siegwart 2013). The price of the hydrocarbon could cause a negative  inflationary impact  which could be increase the level of consumer spending but the overall effect on the economy is quite depression. To restore a strong position, Merger and Acquisition in the energy sector is common.

There is a huge shift in the oil industry with the fall in the price of oil as this would be effecting Mergers and Acquisitions and buying and selling of the Assets.  In the Middle East the question is mainly focused on the two perspective i.e. the international diversification strategies and making long-term regional investment. Some issues need to be focused upon during the falling oil price when they oil sector of Middle East they deliver on their ambition. The need for the efficiency of capital would rise with the perpetual fall in the oil price. PwC reiterated it during a survey in the 2014 that despite the fall in the oil prices, there will be arise in the spending on the projects as the sector has a long-term strategic importance to the national companies and the government.  The survey revealed that from the three quarters of respondents from the contractors, developers, financers and advisors spending on the project are likely to rise in the next 12 months (Hansen, Foldmand Hansen 2014).  The price of oil has dropped quite significantly since the survey, there would not be change in the project plans as this sector holds fundamental importance to the governments of the region, which generates revenue and employment.

Examples

Examples:

The mergers and acquisition in the energy sector is generated in terms of the deals and value that is transacted in comparison to similar periods a year ago. The falling prices of the product in the upstream sector which caused transaction which is smaller. In the US, the acquisition by Noble, WPX, Exxon and Vangard has been made in the Shale plays. Sequa in Norway and Vedanta in India and interest by BP in the Siberian Project made the international purchases.  There were more differences noticed in the number of deals and value of the deals reported. The Cameron acquisition announced by Schlumberger helped in service sector merger and acquisition activities (Serdar Dinc and Erel 2013). The eyes catching deals with the fall in the oil prices was takeover by Royal Dutch Shell’s of BG Group for an amount of 47 billion pounds. This a one off transaction as the deals of upstream has moved towards assets.  There has been a rise in the mergers and acquisition activities in the renewable as there is a demand for the predictable and rise in the yield companies.  Sun Edison who sponsors the two US yield companies are TerraForm Global and TerraForm Power was the leader in the acquisition and of the portfolios from Vivint Solar, Globaleq Mesoamerica Energy, Renova Energis , Atlantic Power and Firstwind (Pätäri et al. 2014). The two major gas utility acquisition in the US was the acquisition of Black Hills of Source Gas which operate regulated natural gas utilities and Southern Companies acquisition of AGL Resources. The momentum with respect to the mergers and acquisition are gained during the downturn when the buyers they wait for the price to be lowered and sellers they wait for increase.

The internal and the external factors that tend to affect the mergers and acquisition in the energy sector is through the SWOT analysis.  Through the SWOT analysis, there would be proper analysis of the internal factors i.e. the strengths and the weakness and external factors like the opportunities and the threats.

Internal factors:

Strength and Weakness:

• Economies of scale:

 The main motive behind the merger and acquisition is the Economies of scale.  Some synergies are gained from the takeovers.  The merger planners they tend to cite the economies of scale as the main operating synergies. There are more benefits that is derived from the economies of scale. The small firms of the energy sector would be engaging in the merger and acquisition activities rather than the large firms so that they are able to enjoy lower cost

• Financing Issues:

Internal factors

Historically it has been noticed that cash most commonly makes the acquisition. This trend has decreased and financing is done partially through cash. Theory has is that the managers with a greater amount of cash flow are trying for value destroying mergers. The managers with few opportunities of investment will be using the cash flow in the unprofitable projects. It has been noticed that the extra amount of cash that is held by the European energy companies will be used in M&A to detriment long-term investment in the generation and the exploration activities (Fich, Nguyen and Officer 2015). Unlike that is predicted by the theory of the free cash flow , firms with even a higher degree of cash flow might also not engage in the Merger and Acquisition activities.

External Factors:

Opportunities and Threats

• Excess Capacity:

This industry level characteristics help in driving the merger activities.  When the firms they face a gap in capacity of production then there will reduction in the efficiency of the asset and so there is a fall in the return on the capital that is invested. For performing the merger and acquisition activities, the firms with excess capacity they look for consolidated resources  so that the issues are resolved (Kolk, Lindeque, and Buuse 2013). There are probability-based models, which will help in understanding whether the firms they engage in M&A or not as per the pre characteristics of merger. When the merger is motivated by the excess capacity then this is a source of economies of scale.

• Corporate Focus:

This a subject quite relevant to the merger and acquisition activities. The researcher they look out for the effect of a merger. The nature of competition tends to vary which would vary the strategic focus (Dess 2012). This type of a strategy in the energy industry is called the inter industry Merger and Acquisition when converge is mainly between the electric and the gas companies. The vertical and horizontal mergers show insignificant changes.

• Market for corporate control:

Through corporate control we mean the rights in the determination of the corporate resources The takeover market is a effective for of disciplinary method for the management of the share holder value and the poorly managed resources are transferred to the efficiently run corporations. There would be higher Tobin’s q for M&A as acquirers. The low level of Tobin’s q of the firms will be prone to the targets (Hill and Jones 2012).

• Deregulation:

Deregulation is a sort of industry shock, which results due to the industry consolidation. The industry shock is   helps in creating the mergers. There is a change in the industry when there is modification in the structure of the industry (Lasserre 2012). Deregulation s a important factor that drives mergers and acquisitions.

External Factors

With the implementation of the strategy of Merger and Acquisition, there have been both benefits and challenges faced by the Energy sector.  The firms in the United States practice this very popular strategy for many years.  The energy sector is a common sector as there is uncertainty in the competitive environment. This type of a strategy will help the energy sector to achieve growth.  The main motive is to increase the value of the firms and this would help in providing more than average returns and strategic competitiveness (Lynch 2012)

The term merger and acquisition is used synonymously but these are not similar. Merger is when the two firms they integrate operation on co equal basis.

Benefits of Acquisition:

There are a number of reason as to why there are acquisitions in the market of Energy  due to the falling price of oil. The big firms they acquire so that they are able to increase their market power and can sell the good at the competitive rate and when the cost of the activities are lower than that of the competitors (Pitt and Koufopoulos 2012). The energy firms they gather their market power. The acquisition would be involving buying the distributor, business, supplier and competitors. This will help in increasing the power of the firms in the market. With acquisition, there would not be any type of entry barriers in the market (Sick et al. 2015).  There is new market with the geographic diversity The firms they are able to access new products in the market.  This is type of collaboration offers lower type of risk than that of developing a newer type of product.  The internal development has a very higher failure rate.  The diversification would be occurring when there is entry into the new market with the new products. It is very difficult to distinguish the current market lines when there is no experience by the firm. Acquisitions can be successful when it is more related. Through acquisition, the competitive scope is going to increase with the dependency by the firms. It is feasible that the acquiring companies with related capabilities build their base of knowledge.

Challenges of Acquisition:

 Researchers have shown that not all the type of acquisition is successful.  There is a greater level of integration difficulty. The most important thing is the shareholder value creation (KamiÅ„ski 2014). There is differences in the systems of control, work, financial and culture. The status of the firms that acquires the energy plant has to face a difficult times.

The targets are no evaluated adequately.  There potential firm evaluated the target firm for acquisition. This might also lead the company to offer higher rate of premium for the company that is targeted.

When the risky type of acquisition is financed through the debts this will help in creating more returns to the moneylender.  Debt is not at all good for the firms as this would increase the bankruptcy, this might lower the credit rating of the firm (Shimizu 2012). Other types of investments help in long-term success of the energy firm.

There is no synergy achieved that means the value created exceeds the value of the units that work independently. Synergy can be achieved when the firm’s assets are complementary in nature. This will be imitating the competitive advantage.  There is a huge possibility of the firm to underestimate the costs and over estimate the synergy (Nisar, Ruiz and Palacios 2013). Private synergy would be occurring in the integration and combination of the firms that acquire the asset and for the development of the core competencies. Private synergy is quite difficult.

Diversifications by the energy-producing firms are likely having lower performance results.  There is a need for more amount of information for greater type of diversity.

Figure: Acquisition Strategy Framework (Model)

(Source: Holburn and Vanden Bergh 2014)

Some steps through are followed for acquisition process. The above model represents the five stages of the acquisition process.  In the first stage there is early growth, where the product is innovated, then there is rapid growth which involves development of the standards. The next phase is the process innovation, which involves external value proposition. The second last stage is the stability and then the last stage involves innovation or decline (Raimbault and Barr 2012).

Benefits of Merger:

Merger is likely to occur when the firms they come together as one.  The firms they would be having a large market share and lower level of competition. When there are merger the firms, they enjoy large economies of scale in the market. This will help in lowering the average cost and lower the price offered to the customers.

Figure: Lower levels of Cost

(Source: Yoo, Lee and Heo 2013)

Merger will help in competing in the international market  and also helps in posing threat to the competitors. The firms making a merger will have more profit so this is financed in the risky investment. This would help in maintaining better quality of the goods. This is true for the energy sector as there is a need for huge amount of investment.

There would be greater amount of efficiency with the elimination of the redundancies.  Mergers are a way of safeguarding the companies from closing. Firms who are struggling to stay afloat  thinks that mergers are a convenient option. With the merger  there is greater sharing of knowledge by both the industries.

Challenges of Merger:

Just like the innumerable type of benefits from the merger there are also some challenges that is faced by the firms. There are legal issues that are faced by the firms. Legal factors needs to be considered prior to merger as this might  created a large penalty on the merger firm. 

Mergers happen across the world. Difference in the culture that firm has to face along with upheavals in the business operations. The outcome of the merger is threatened by the differences in the cultures. It would be difficult for the firms to coordinate the workers (Cartwright and Cooper 2012).

The problem of integration is quite significant.  The resources and the efforts of the company, combined through all the type of resources together in the organization. The planning of integration is related to the cultural issues this is directly related to the process of planning.

Conclusion:

Thus, energy sector is going to survive the perpetual fall in the oil prices during 2014-2016 due to the acquisitions and the mergers. This would help in gaining access to the newer type of market, facilitates effective Research and development in the system and efficient running of the organizations. The small firms due lack of finances try to merge and collaborate with the other firms so that they are able to overcome the difficulties of lower oil prices. It has been seen that there is going to be investments made in the projects irrespective of the falling oil price in the national interest.

References:

Cartwright, S. and Cooper, C.L., 2012. Managing Mergers Acquisitions and Strategic Alliances. Routledge.

Dess, G. (2012). Strategic management. New York: McGraw-Hill/Irwin.

Fich, E.M., Nguyen, T. and Officer, M.S., 2015, March. Large wealth creation in mergers and acquisitions. In AFA 2013 San Diego Meetings Paper.

Hansen, U.E., Fold, N. and Hansen, T., 2014. Upgrading to lead firm position via international acquisition: learning from the global biomass power plant industry. Journal of Economic Geography, p.lbu050.

Hess, S. and Siegwart, R.Y., 2013. R&D Venture: proposition of a technology transfer concept for breakthrough technologies with R&D cooperation: A case study in the energy sector. The Journal of Technology Transfer, 38(2), pp.153-179.

Hill, C. and Jones, G. (2012). Strategic management essentials. [Mason, Ohio]: South-Western.

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KamiÅ„ski, J., 2014. A blocked takeover in the Polish power sector: A model-based analysis. Energy Policy, 66, pp.42-52.

Kolk, A., Lindeque, J. and Buuse, D.V.D., 2013. Regionalization strategies of EU electric utilities. British Journal of Management.

Lasserre, P. (2012). Global strategic management. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

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Lynch, R. (2012). Strategic management. Harlow, England: Pearson.

Nisar, A., Ruiz, F. and Palacios, M., 2013. Organisational learning, strategic rigidity and technology adoption: Implications for electric utilities and renewable energy firms. Renewable and Sustainable Energy Reviews, 22, pp.438-445.

Pätäri, S., Arminen, H., Tuppura, A. and Jantunen, A., 2014. Competitive and responsible? The relationship between corporate social and financial performance in the energy sector. Renewable and Sustainable Energy Reviews, 37, pp.142-154.

Pitt, M. and Koufopoulos, D. (2012). Essentials of strategic management. London: SAGE.

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Serdar Dinc, I. and Erel, I., 2013. Economic nationalism in mergers and acquisitions. The Journal of Finance, 68(6), pp.2471-2514.

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Sick, N., Preschitschek, N., Bröring, S. and Leker, J., 2015, August. Market convergence in the field of stationary energy storage systems. In 2015 Portland International Conference on Management of Engineering and Technology (PICMET) (pp. 571-584). IEEE.

Yoo, K., Lee, Y. and Heo, E., 2013. Economic effects by merger and acquisition types in the renewable energy sector: An event study approach.Renewable and Sustainable Energy Reviews, 26, pp.694-701.