Merger Motives and the Merger Plan

As seen in chapter 2, companies merge based on a variety of reasons, such as access to competencies, resources and market shares, as well as internationalization. Some mergers are merely motivated by cost reduction through restructuring and downsizing, or other synergy effects, and some are motivated purely by management motives. In the Statoil-Hydro case the merger was driven by several motives. The objective for the merged company was to be a competitive global participant in the petroleum industry, and to become the world’s largest operator for offshore projects in water depths of more than 100 meters. The merged company would have a greater ability than each of the companies alone to secure further growth in an environment with increasing competition for new resources, and increasing technical

complexity in available projects (Storting’s Proposition 60, 2006-07; Statoil-Hydro Merger Plan, 2007). The merger can be characterized as a horizontal merger of two former

competitors motivated by a goal of international growth, more efficient operations internationally, scale-based efficiencies and expansion into new markets.

The scale economies would create a stronger possibility to pursue the international growth ambitions because of the joint forces in technological, operational and financial assets. The scale efficiencies would therefore be essential in the strengthened competition on accessing new oil and gas resources (Storting’s Proposition 60, 2006-07). Accessing and exploring new oil and gas reservoirs on the Norwegian Continental Shelf had become more and more difficult the last decades. Statoil and Hydro anticipated that the combined company would

have a better ability to explore, develop and produce oil and gas in technically demanding areas of the Norwegian Continental Shelf in the future. The required technology changes constantly, and therefore by combining the technological skills and knowledge of the two companies the merger would stimulate faster development and greater use of new innovative technologies. This would strengthen the company's position as one of the world's leading technology-driven oil and gas companies (Storting’s Proposition 60, 2006-07).

The new size of the company and the workforce would create a company better equipped for the future. By developing and combining the companies' total workforce of about 31,000 people, including 20,000 in exploration and exploitation, the combined company would be better prepared future challenges. The oil and gas industry faced significant challenges in securing the necessary expertise in the years ahead. The merger would result in a company with greater human capital, project execution capability and operator expertise both at home and internationally. The technological expertise the companies had built the last 40 years would make the combined company internationally competitive (Storting’s Proposition 60, 2006-07). As one of the world’s largest companies in petroleum production in deep water, the new company would be a more attractive customer for the supply and service industry. In the long term the merger would create more efficient use of resources and reduced costs in supply and services in use. The size and the combined forces would also be better equipped in terms of meeting the growing demand for renewable energy (Storting’s Proposition 60, 2006-07).

Other synergies were also an important motive in the merger. It was expected that the merger would contribute to significant cost-reductions through increased efficiency in the

exploration, development and production phases. Internal resources would be transferred to other activities and areas of growth. The merger synergies were expected to continue over

time to lead to more revenue for the combined company than for the two companies separately through more efficient use of limited resources in relation to drilling and well activities, increased exploitation, integrated operations, management and international experience (Storting’s Proposition 60, 2006-07).

Geographical proximity is also mentioned as one of the motives for the merger. The activities of the two companies, both at the Norwegian Continental Shelf and in the world, are

overlapping.  And by combining the two companies' international production and development portfolio, the combined company would benefit from a broader global presence. The new company would therefore strengthen its position in several areas, such as the Gulf of Mexico, West Africa and North Africa. It would hold a diversified portfolio of future development projects, and Statoil and Hydro viewed the geographical spread of the merged company's oil and gas production of strategic importance in order to develop their combined reserves on a medium and long term (Storting’s Proposition 60, 2006-07).

Helge Lund, President and CEO of Statoil stated the following in connection with the announcement of the deal:

“The time is right for a strong Norwegian-based energy champion. We are creating a stronger and more competitive company. Combing the best of both organizations, we will significantly improve our competitive position

internationally and promote long-term vitality of the Norwegian Continental Shelf” (Stock market announcement Dec.18 2006).

The following statement from the Statoil and Hydro boards of directors can summarize the ambitions and motives behind the merger.

“Statoil’s and Norsk Hydro’s boards of directors each believe that the combination of Statoil with Hydro Petroleum will create a Norwegian-based international oil and gas company that will be a more forceful international competitor than either Statoil or Hydro Petroleum would be on its own, with greater capabilities to accelerate growth, respond to the challenging

competitive landscape of the energy industry and deliver long-term value to shareholders” (Merger Prospectus, 2007: i).