“In light of the current industry environment, can Texaco and Shell remain competitive in an alliance environment or will a merger be necessary in order to survive?”
Competitive Analysis
- Environment/Industry
- Barriers to entry include:
- Exxon, Chevron, Mobil, Shell, and Texaco account for 60% of U.S. lubricant base oil production
- Strong oligopolistic industrial structure
- Economies of scale
- Complex technologies
- Extensive distribution networks
- Elaborate sales and marketing activities
- Competition is direct and highly specialized
- Steady decline in oil prices
- Strict laws and regulations in the lubricant industry
- Firm
- Texaco is ranked as one of the top 5 oil companies in the world
- Texaco controls 7.1% of the total U.S. gasoline and automotive lubricant sales
- Texaco controls 6.6% of the total U.S. refining capacity
- Texaco has experience and history with maintaining long-term alliances: Formed Caltex with Chevron in 1936
- Equilon Enterprises has an estimated 14.3% market share in its geographic area
- Marketing Strategy
- Texaco’s objective is to be one of the leading worldwide oil and petrochemical companies with a high rate of return to its stockholders
- Texaco is dedicated to customer satisfaction and producing exceptional products and services.
- Texaco’s primary focus is on worldwide exploration and production of natural gas.
Finance
- Equilon has a debt to total capital ratio of 25%
- Equilon Enterprises has annual gross revenue is estimated at $24 billion
- Equilon Lubricants is comprised of 10 Texaco and Shell lubricant plants, with assets worth $750 million
** Without further financial information, I am unable to calculate any profitability, liquidity, or activity ratios for Texaco, Inc. **
Strategic Alternatives and Discussion
- Texaco, Inc. merges with Shell Oil Company.
Benefits of Alternative #1
- Costs will be cut by billions of dollars
- Enhance portfolios with the combination their advanced technologies
- Increased market share
- Stronger competition for other merged companies
- Both companies are able to find oil and natural gas more easily and more cheaply than they could on their own
- Better able to absorb risks
- Elimination of duplicate facilities
Costs of Alternative #1
- Chance of failure
- Layoffs
- Opposition by consumer advocates who might feel that the business of producing oil, refining it into gasoline and selling fuel to the public already is concentrated in the hands of too few companies
- Texaco, Inc. does not merge with Shell Oil Company, but continues the two alliances of Equilon Enterprises and Motiva Enterprises.
Benefits of Alternative #2
- With the Equilon alliance, Texaco will gain market share and generate $45 billion in annual revenues.
- Lower costs
- Increased profits
- Puts pressure on other lubricant companies
- Creates value for both brands
Costs of Alternative #2
- Texaco might not survive on its own because of the increased competition
- Conflicts can arise between Texaco and Shell because products are continually sold under each brand name separately, which means the two companies are still competing against each other
- Texaco, Inc. merges or enters into alliances with another company, such as Chevron in the industry.
Benefits of Alternative #3
** The benefits will be the same as in Alternative #1. **
- Costs will be cut by billions of dollars
- Enhance portfolios with the combination their advanced technologies
- Increased market share
- Stronger competition for other merged companies
- Both companies are able to find oil and natural gas more easily and more cheaply than they could on their own
- Better able to absorb risks
- Elimination of duplicate facilities
Costs of Alternative #3
** The costs will be the same as in Alternative #1. **
- Chance of failure
- Layoffs
- Opposition by consumer advocates who might feel that the business of producing oil, refining it into gasoline and selling fuel to the public already is concentrated in the hands of too few companies
Selection of Alternative
As mentioned before, Texaco and Shell were unsuccessful at an attempt to create a joint venture in Europe due to a disagreement on the percentage share. Shell wanted an 88-12 split which would not have given Texaco maximized shareholder value. Because of this event, I believe that a merger between Texaco and Shell (Alternative #1) is not plausible.
I recommend that alternatives 2 and 3 should be combined: Texaco, Inc. should continue its alliances (Equilon Enterprises and Motiva Enterprises) with Shell Oil Company while it searches for a merger with another company in the industry. The success of the alliances has proved beneficial for both companies: both alliances have almost 15% of the total U.S. gasoline and automotive lubricant sales as well as about 12% of the total U.S. refining capacity. Nonetheless, Equilon Enterprises alone has an estimated $24 billion in annual gross revenue. In addition, a merger will allow Texaco to gain a new place in the industry. Because of increased competition, Texaco might not survive on its own. Therefore, it is imperative that Texaco search for a complementary company to combine their competitive advantages. With a possible merger, both companies will save billions of dollars, have an increase market share, and will be better able to take on risks in new ventures. Nonetheless, the merger will allow both companies to become a super conglomerate in the oil and lubricants industry.
