Academic journal article Canadian Social Science

Mergers and Acquisitions: The Performance of the Acquiring Firm-Empirical Study of Cheverontexaco

Academic journal article Canadian Social Science

Mergers and Acquisitions: The Performance of the Acquiring Firm-Empirical Study of Cheverontexaco

Article excerpt


This paper analyzes a merger in the oil industry; in the case of Chevron and Texaco. Oil is assumed to be a homogeneous good which is produced by a small number of firms with different unit costs. Merger formation is endogenously explained as a result of cooperative decisions. It is shown that merger participants are very asymmetric if prior costs of production differences are moderate. If cost differences are large, however, the more efficient firms participate in the mergers to enjoy production efficiency, while the least efficient firms are not attractive partners and, there tore, remain independent in the post-merger market. Moreover, the research tries to investigate Chevron share retums if the merger has achieved its goal of maximizing shareholders wealth.

Key words: ChevronTexaco; Merger formation; Oil industry


On October 16, 2000, Chevron announced plans to acquire Texaco. The merger was subsequently approved by the Chevron shareholders. This is somewhat unsettling why would the shareholders of Chevron agree to lose almost 10% on their holdings, especially given that the largest shareholders control almost a quarter of the company voting Stock? This example, while Striking, is by no means an exception many studies show that average returns to acquiring-firm shareholders are negative, or at best slightly positive, while average retums to target-firm shareholders are positive and high, when both companies are publicly traded. Moeller, Schlingemann, and Stulz, (2005)

The general consensus among those in the fleld of finance is that the prindpal goal of a Erm should be the maximisation of stockholder.s weaith. Management of fmns strives t0 ensure that all major decisions taken are geared towards achieving this all-important goal. This goal is achieved by ensuring that the resources of the firm are efficiently employed. Few companies enjoy the luxury of having no serious competitors or little likelihood of need to change their competitive strategy. It is therefore essential for companies to look for opportuniEes to create _ the sustain _ a competitive edge over their rivals and build customer loyalty that provides something of a comfort zone. Thus, businesses operating in today.s highly competitive, uncertain and rapidly changing world continue to change in reaction to events as moves by the competition, shifts in technology or new customer demands. Nothing appears SO compelling as the need to survive However, there is little doubt as to how, overwhelmingly, this choice is exercised: it is to achieve the greatest possible rate of corporate growth as measured in sales.

Few business people today need to be persuaded that firms should be growth-oriented. The firm that does not to grow, it is argued, is likely not merely to stand still but to stagnate and die. The firm's current ownership and management should not be taken for granted. If it is possible for the value of the firm to be enhanced by changing management or by reorganizing under new owners, there will be incentives for someone to make a change. One of the ways through which the value of the firm could be enhanced through change of management is by the purchase of another firm in a merger or acquisition. Mergers and acquisitions have become indispensable tools in building a new generation of companies with the power and resources to compete on a global basis. While mergers have actually been around since the 1980s, they have in recent years dramatically transformed and redefined the business landscape. The business world is in the midst of a "merger wave." When done for the right reasons and in the right way, mergers and acquisitions can indeed be beneficial. They can increase overall efficiency and profitability in the economy by creating new value in the combined companies. The merged entities themselves stand to reap significant rewards in terms of more efficient production, enhanced market coverage, technological advances, and better use of physical resources. …

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