Describe the firms in the proposed merger. List their annual sales and the extent of their operations
Exxon Mobil Corporation or ExxonMobil is an American multinational oil and gas corporation. The merger of Exxon and Mobil formed it with the emerging company being headquartered in Irving, Texas. According to Agreement (n.d.), the parent corporation is closely related to the Imperial Oil corporation that conducts its operations in the Canadian Oil industry. Operating in the industry as a multinational corporation, the company’s market is made up of various countries and firms around the globe and therefore the company does not restrict itself to the U.S and Canadian Markets.
The company has grown and expanded immensely because it also owns hundreds of smaller subsidiaries such as Imperial Oil Limited in Canada hence being in a position to be one of the largest employers that employ over 82,000 people worldwide. The organizational structure of the firm is made of a number of global operating divisions that are grouped into three categories for reference purposes (Barone & DeCarlo, 2003). Exxon Corporation posts large profits every financial year that enables the firm to boast of an average annual profit of $36 billion (Mazzeo, 2000).
Irving Corporation that was instituted in 1924 owns the largest refinery in Canada and owns, in whole or in part, six terminals in Canada and the northeastern United States. Irving supplies branded and unbranded petroleum products in Canada and throughout New England to third-party distributors, retailers, various other re-sellers, and governmental and commercial end-users. Irving also owns retail travel plazas that sell gasoline and diesel petroleum products. In Maine, Irving owns a terminal in Searsport and co-owns a terminal with CITGO Petroleum Corporation in South Portland. Irving has average estimated annual sales of $15 million per location (Pautler, 2001).
From the firms’ point of view, what are some of the incentives to consolidate?
The acquisition of some of the assets belonging to Exxon Mobil was motivated by several factors. Among these, include large-scale production. This means the company was able to produce a large number of units at the same cost thus resulting in a decrease in the cost of production. Utilization of a few customers in its coalesced subsidiaries promised a large amount of output with less having to be paid as salary expenses (Mazzeo, 2000).
The wide area captured by the great Exxon Mobil also motivated Irving to acquire parts of its assets, as little would be spent in marketing its products. In short, Irving could have benefited from the strong market created by Exxon Mobil. As a result, this would ensure more profit from the new acquisition. Irving also targeted the experts already existing in Exxon Mobil as they had better skills in producing the energy products.
Irving knew that the development of a new project would require time and money. This was to ensure standards were to be maintained as far as employees’ profession is concerned. The third incentive of consolidation was due to the high technology Exxon had been equipped with for a long time. Exxon had dominated the market for its quality products. They contributed little to air pollution as compared to other firms (Mazzeo, 2000).
List and describe the firms in the industry
Other firms that exist in this market include Buckeye. Buckeye is a multinational corporation that operates in the U.S. by owning or managing approximately 7,500 miles of pipeline, boasting ownership of approximately 70 active refined petroleum product terminals, and marketing refined petroleum products in some of the geographic areas served by its pipeline and terminal operations. Buckeye is not a party to the original transaction and does not currently market, transport, or store light petroleum products in Maine.
Describe the product, production methods, scale of production, and sources for raw materials. What technologies are used?
These companies are specialized in producing crude oil and natural gas. They also refine petroleum products. At terminals of petroleum products, we have products like gasoline, diesel fuels, heating oil, kerosene, and jet fuel among others (Pautler, 2001). Production processes used include:
- Rig work: This involves constructing the drilling rig and drilling the well. As professionals drill the well, they install a series of protective steel-and-cement layers that maintain the integrity of the well and protect the surrounding formations. In the upper part of the well, multiple layers of cement and steel casing are installed to create an impermeable barrier between the well and groundwater zones. Drillers also use casing deeper in the well to ensure its integrity and to isolate natural gas formations from the surrounding areas.
- Hydraulic fracturing: Hydraulic fracturing is a technique used relatively briefly during the good completion process. It often takes place a mile or more below groundwater supplies. Shale rock has gas trapped in pores smaller than the width of a hair, so we must create a network of small fissures in the rock to release the gas. This involves injecting a mixture of 90 percent water, 9.5 percent sand, and 0.5 percent chemicals into the well at high pressures to keep the fissures open, which allows the gas to flow. Again, the activity is continuously monitored.
- Producing natural gas: Once a well is drilled and completed over the course of a few months, it is ready for production. Everything is dismantled except for a four-to-six-foot wellhead and the local processing facilities that connect to gas lines that eventually run to the national distribution network (Pautler, 2001).
The products are usually produced on large scales. In addition, they are also sold on a large scale to several wholesale and retail customers. This lowers the cost of operation hence promoting the level of profits in the firm. Several subsidiaries especially Irving Energy and Exxon Mobil have helped spread the selling units. For these companies, crude oil has been the major raw material for producing valuable oil products. The current technology of increasing efficiency, developing new supplies, and safeguarding the environment is the key issue in these firms. Firms increase output through efficiency while at the same time minimizing costs and the great effect caused on the environment (FTC, 2011).
Describe the competitive environment within the industry. Is there a dominant firm? Are the other firms follow or actively compete? How do they compete? (For example, by using price, advertising, quality, or some other variable
There are four companies providing gasoline-terminating services in the South Portland area. This tells us some kind of oligopoly market exists in these areas. However, this enhances competition through prices and the quality of products offered for benefit of individual citizens. The government always intervene in the market by preventing huge market share by one company thus creating favorable condition for companies to compete among themselves. For instance, Irving Energy was prevented from acquiring some of Exxon Mobil assets in Maine.
Report and interpret the 4 firm concentration ratio, the 8 firm concentration ratio, and the Herfindahl Herschel Index for the industry
South Portland area: market share report and interpretation
Cr4=Irving (30%) +Exxon(20%) + s3(5%) +s4(8%)=63% oligopoly market
HHI=900+400+25+64=1389 slightly concentrated market.
The argument for and against mergers
Competitions among firms in the market have been of more benefit particularly to consumers. Competition ensures a firm offers its product at affordable prices, as most consumers would buy from suppliers with low prices of goods and services. This will force firms to produce goods at a relatively low cost. In addition, firms would try to offer competitive products that attract consumers, as they are perceived to benefit more as compared to other products.
This ensures consumers are equipped with quality products (FTC, 2011). In the oil industry, the competition will be able to benefit society as oil products will offer at competitive rates. This means no one would have a greater influence over the market price of gasoline and other petroleum products. In addition, firms would try to come up with energy-saving products that would have less contribution to environmental pollution (Agreement, n.d.).
A high degree of concentration is a threat to the market, as some features of monopoly will emerge from the ongoing oligopoly market. The existence of few firms might force firms at the market to practice features of monopoly by forging common standards of offering products at the same but high prices. Therefore, less concentration would deprive the firms existing in the market of such opportunities. For instance in this market allocation of goods and services will depend on the ongoing market equilibrium (Barone & DeCarlo, 2003).
If the industry were experiencing rapid technological change, then forging of common standards by an oligopoly market structure would not optimally benefit both businesses and consumers. In such industries, every firm should keep abreast of the change in technology that would ensure its products are up to the levels appealing to customers as compared with its partner’s products. Forging common standards prevents firms from adapting quickly to the rapid change in technology.
This means most firms will be remaining behind the technology due to its sluggishness in keeping up with the – changing technology (Mazzeo, 2000). Conversely, coalescing of firms in terms of setting particular prices of forging common ground of standards about the rapidly changing market technology firms are likely to be safer. This is due to the insulation against less profit because of charging low prices and high costs of keeping up with the frequent change of technology.
References
The agreement, (n.d.). Analysis of proposed agreement containing consent order To aid public comment. Web.
Barone, M. & DeCarlo, T. (2003). Emerging Forms of Competitive Advantage: Implications for Agricultural Producers. Web.
FTC, (2011). Federal Trade Commission: Protecting America’s Consumers. Web.
Mazzeo, M. (2000). Product Choice and Oligopoly Market Structure. Web.
Pautler, P. (2001). Evidence on Mergers And Acquisitions. Web.