Mergers and acquisitions and controlling corporate firms in energy and banking sectors
September 01 2020 05:36 PM
Saad al-Kuwari
Saad al-Kuwari

By Saad al-Kuwari

• What is the difference between mergers and acquisitions and controlling corporate companies in the oil and gas and Banking sectors?

• A specialised financial, technical and marketing feasibility study determines the correctness of mergers and acquisitions or not, and whether a re-evaluation of mergers and acquisitions is necessary?

• Readiness of leaders and accumulated experience are two basic factors for mergers and acquisition plans!

In the next article, we will discuss ways of merging companies in the petrochemical and mining sectors and restructuring for the purpose of raising the profit margin, integration and return on the portfolio of these companies.

We hear a lot in visual, audio and written news about operations and mergers and acquisitions, and to a lesser extent, control of other companies. However, there is often ambiguity and scientific inaccuracy in relation to the more precise term regarding this topic, and here you will know the difference between these processes and their definition separately.

First, Merger: It is when company ‘A’ merges with company ‘B’ and the two companies disappear, and a new company is established, which is a joint company ‘C’ made up of the two merged companies.

For example, the merger of Exxon with Mobil, Qatargas and RasGas, and it is called a unified company ‘QG’.

Second, Acquisition: It is when company ‘A’ buys company ‘B’ and this company disappears and continues to work only with company ‘A’. Example: Qatar Petroleum's acquisition of Qatar International Company, Tasweeq and Al-Seef Company, because Qatar Petroleum owns the shares and in its capacity as the legal representative of the government, legally these companies can be included under the umbrella of Qatar Petroleum.

Third, Control: It is the most widespread form seen today and we hear, see or read it in the news frequently. For example, company ‘A’ buys company ‘B’, but the two continue to operate without any significant changes to their legal entity. Like Amazon controlling, both companies follow their operations, have their own headquarters, their work teams, and everything is as it is.

Facebook also controls WhatsApp. Industries Qatar took control of QAFCO and bought QP shares.

It was recently raised that the merger and acquisition, or control of some government oil and gas companies over their subsidiary or parallel companies in the sector may have successful economic effects in the long run.

This is in the event that the merger or acquisition is based on its strategy that restores the extent and full economic feasibility and not just with the purpose of reducing operating expenses only.

And this enhances competitiveness, reduces operating expenses and increases productivity, knowing that the merger or acquisition of global and regional oil companies began early in the nineties of the last century.

The merger and acquisition based on extensive economic studies and careful administrative and technical foundations may bring the oil, gas and petrochemical sector trains (a plant’s liquefaction and purification facility) to the right track, especially in light of the global and regional economic blocs that are clearly visible to the world and are moving towards achieving their goals set according to various plans. And also long-term strategies in light of the challenging conditions in the oil and gas market, the coronavirus pandemic, the declining demand for fuel, oil and gas, and the slowdown in the global economy.

The merger, acquisition and integration of hydrocarbon entities give more scope for defining responsibilities, in addition to the optimal use of facilities, installations and factories.

There is no doubt that the merger works to reduce the cost and optimise the utilisation of efficiencies, as increased productivity is accompanied by increased profits, especially with the ability of these companies to own fixed and mobile assets and secure access to other markets and not only equalling operating budgets, exclusivity of decision, neglecting profit margin, increasing sales and productivity.

According to McKinsey research, only 16% of re-mergers, acquisitions, or control operations fully achieve their goals in the planned time, 41% take longer than expected, and in 10% of cases fail and actually harm the newly formed entity or company.

This is due to the lack of economic and administrative integration between the merging parties, the weak leadership of the integration, and the focus on centralisation in the decision only without looking ahead to the objectives of merger or acquisition.

The following report has more details: What are the advantages of mergers or acquisitions and integration between companies and evaluation after mergers and acquisitions?

In the beginning, mergers and acquisitions of companies specialised in the oil and gas sector have several advantages, as those international oil and gas companies merged their sectors according to activities in the first place, then according to their geographical locations, and those operations took place in the late 1990s.

In the past, the process of beginning mergers was in the hands of international oil companies, followed by the national oil companies and other specialised oil companies.

And it is worth noting here that most national companies have tended to merge operations (except for a few) due to their special circumstances to reduce operating expenses and equalise their faltering budgets as a result of the deterioration of oil and gas prices and also to increase productivity as planned.

As it is known, the merger and acquisition is economically feasible according to activities in similar fields as it is known. For example: Refineries, chemical fertilizers, petrochemicals, gas industry, chemical additives, mining, iron and steel, oil derivative distribution companies and other hydrocarbon industries.

Hence, these companies do not need administrative, technical and operational devices for each company separately to manage them. And they also do not need several executive heads or several boards of directors, and there should be a unified board of directors to reduce administrative expenses and unified technical and marketing departments.

There are many studies and research conducted to guide and evaluate mergers since 2001 and from more than one international consultant. These are to assess the situation in oil and gas companies and propose a new structure and see whether it can continue on the same structure or change and not just continue the merger/acquisition without an evaluation of the results, after the operations.

The merger and acquisition done through the independent government regulatory departments that follow the government, is in order to implement the principle of transparency and avoid conflicts of interest and ensure the correctness of decisions related to mergers and acquisitions or establishing companies.

What are the disadvantages of a merger between companies?

As for the negatives that may mar the decisions of a merger and acquisition, of course, there are several of those.

According to the Harvard Business Review, between 60% and 70% of mergers and acquisitions fail, and the reasons for these are complex due to a lack of understanding of the business system and procedures, an inability to leverage each other's strengths, technology integration problems, and a host of other things that can cause failure, for example, work environment, motivation, development, etc.

Expansion, increase in production and flexibility of work!

Every entity, whether an institution or a company, has its own conditions that it passes through. These circumstances determine the eligibility and possibility of these entities to merge and join sectors from nothing, stressing that specialised and extensive feasibility studies on mergers are what determine the final decision.

Senior experts in mergers stress that specialisation in individual companies, dedicated to its field, raises efficiency and focuses on operations and benefits the administrative and financial aspect, as the focus will be more on work than others. This stresses on the fact that the uniqueness of each company with its assigned work reaps greater focus on work, efficiency and good work and competition.

The work of the competing companies in one field leads to the strength of competition and the provision of each company to the best in product, profits, efficiency and other advantages that result from a clear institutional scope.

I think that there is no harm in having several companies in one sector, even if the disciplines are similar.

I would like to clarify that the process of merging companies or leaving them as it is, is related to the seriousness of the path for each of the two directions, especially since this step depends on administrative decisions and the seriousness of leaders of those administrative and technical companies and their readiness for these cases.

Taking decisions in such cases is difficult, choosing leaders is even more difficult and putting the appropriate leaders in the appropriate place represents the cornerstone of those choices, especially those who have accumulated experience and practice implementing projects and putting them on the ground.

n Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.

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