Over two-thirds of all mergers fail, with the failures blamed on post-merger issues such as execution gaps, lack of cultural alignment and integration problems. Closer scrutiny of failed mergers and acquisitions in the oil and gas industry paints a different story. It appears CEOs and board members often create the conditions for failure by ignoring the most critical stakeholder, the customer, and instead focusing on cost cutting and efficiency as the primary source of shareholder value.
General Electric’s botched acquisition of Baker Hughes is a prime example. In 2016, GE acquired Baker Hughes for $30 billion and sank millions into post-merger integration. By late 2018, GE announced a separation from Baker Hughes, valuing the latter at less than $15 billion.
More recently, McDermott CEO David Dickson billed the company’s 2018 merger with Chicago Bridge & Iron Co. as “an exciting day for McDermott,” stating, “We are confident that the execution of our ‘One McDermott Way’ strategy will allow us to drive value for our stockholders and meet the continuously evolving needs of our customers.” By Sept. 18 of this year, McDermott’s stock had lost 90 percent of its value, compared to a 17.7 percent decline in the energy sector exchange-traded fund. Post-merger integration could not save the day.
And just this spring, Occidental CEO Vicki Hollub won the battle against Chevron to acquire Anadarko, with the help of Warren Buffett’s $10 billion cash infusion. Buffett rationalized the merger as “a bet on the fact that the Permian Basin is what it is cracked up to be … oil prices will determine whether almost any oil stock is a good investment over time.” No word of post-integration issues from the Oracle of Omaha.
Our 2014 study of 429 mergers shed light on the relative benefits of adopting a cost reduction focus relative to a customer focus. By measuring the cost focus and customer focus of each merger, the study ascertained their effect on shareholder value. The results were different than the philosophy prevalent in the oil and gas industry. Compared with mergers that focused only on efficiency, mergers that simultaneously focused on efficiency and satisfying customers created 530 percent more value for shareholders. Companies contemplating mergers and acquisitions make a mistake when they skip the customers’ perspective.
Take the case of Anadarko, which was wooed by Chevron and ultimately acquired by Occidental. The SSI for Chevron-Anadarko is 77, indicating above average synergy, while the SSI for Occidental-Anadarko stands at 57, indicating only average synergy. Thus, achieving sales growth would have been easier for the Chevron-Anadarko combination than it will be for the Occidental-Anadarko merger.
Other potential mergers show similarly glaring omissions that CEOs fail to consider. Although C&J Energy Services recently merged with Keane Group, customers perceived C&J as being more synergistic with Halliburton or Schlumberger.
To improve the success rate of mergers and acquisitions in the oil and gas industry, CEOs need to evolve their ossified approach from focusing on cost-based synergies to customer-based synergies. The primary yardstick for merger success cannot continue to be cost savings and efficiency. Otherwise, the cycle of lackluster success, or failure, will keep repeating with CEOs and board members destroying even more shareholder value under the guise of efficiency and cost cutting.