By Justin Scheck And Sarah Kent
LONDON--With its $70 billion deal to buy BG Group PLC, Royal
Dutch Shell PLC will attempt something altogether new for the
108-year-old energy giant: absorbing a huge company.
It is an endeavor with which the Anglo-Dutch oil producer has
limited experience. Shell sat out the wave of energy megamergers
after the 1998 oil-price collapse as Exxon bought Mobil, BP PLC
acquired Amoco, Chevron Corp. tied up with Texaco and Total SA
purchased Elf.
In the past two decades, Shell executives argued that growing
"organically" was a more cost-effective strategy. It's a point that
Shell Chief Financial Officer Simon Henry repeated as recently as
January. Spending on entire companies, as opposed to exploration,
amounts to "paying for someone else's success," he said earlier
this year.
The proposed BG tie-up, expected to be completed in early 2016,
would rank as the second-priciest energy deal ever, behind Exxon's
acquisition of rival Mobil in 1999. Before BG, Shell's biggest
purchase was Canada's Duvernay Oil Corp., which cost it more than
$5 billion, according to the company.
By contrast, rivals Exxon Mobil Corp., Chevron and BP have each
made blockbuster deals requiring wrenching integrations of
multinational workforces and projects. Exxon's $82 billion tie-up
with Mobil and BP's $52 billion-plus deal to buy Amoco transformed
the companies, expanding their reach into new regions and
businesses.
Shell--which has more than 90,000 employees in 70
countries--would digest a company with close to 5,000 employees,
active in about 20 nations. Some of the most-attractive assets
Shell would acquire from BG come with risks, including a corruption
scandal at Brazil's state oil company--a major partner of BG's--and
a costly liquid-natural-gas project in Queensland, Australia.
"Frankly, Shell doesn't really have" experience managing large
acquisitions, said Jefferies Group LLC analyst Jason Gammel.
Shell's record with the relatively small companies it has
acquired is mixed. Its 2002 acquisition of Enterprise Oil, for
about $5 billion, later resulted in a $330 million charge for
unsuccessful exploration. Its acquisition of Duvernay at the height
of the oil-price boom in 2008 bought it access to promising
shale-gas acreage in western Canada. But it hasn't improved Shell
profits, said Mr. Gammel.
Shell also spent $4.7 billion for most of U.S. shale player East
Resources Inc. in 2010. But it later wrote down the value of its
North American holdings by around $2 billion, and scaled back its
shale business.
Shell declined to comment on its previous acquisitions and how
well it integrated them, but said the assets it acquired through
East Resources remain a growth opportunity.
Shell and other major oil companies' approach to shale shows the
risks in mistimed acquisitions, said Pascal Menges, a fund manager
with Swiss investment house Lombard Odier. They largely missed
shale profits because they waited until prices were too high before
buying in.
"They just picked the wrong areas at the wrong time," said Mr.
Menges. His global energy fund has about $1 million in Shell
stock.
Still, Shell has made changes in its corporate structure over
the past decade that could help it absorb a giant acquisition. For
decades, it had been two semi-separate companies, Royal Dutch,
based in the Netherlands, and Shell, centered in London.
After a 2004 accounting scandal, it consolidated its management
and restructured. People who used to work with Shell's deal team
say it has also changed since then, becoming a more centralized
organization.
The reorganization removed a financial obstacle to acquisitions.
For a long time, the dual structure hampered Shell's ability to
make deals using stock. Combining the two entities allowed Shell to
use its shares for 70% of the BG bid's value.
Despite their cultural challenges, significant energy mergers
have generally worked in the industry as a whole, said George
Bason, a lawyer at Davis Polk & Wardwell LLP who has worked on
several of the biggest energy transactions of the past two decades.
"I'm not saying it's easy," he said. "I'm just saying there has
been a number of quite successful integrations."
While Shell doesn't have experience integrating a big company,
it has developed a methodical process for evaluating potential
acquisitions, say bankers who worked with Shell. That groundwork
should help it manage the complex process of integration.
Almost all banking relationships have been handled by Shell's
outgoing treasurer, Andrew Longden, they say. He has historically
maintained contacts with a relatively small number of merger
specialists, sometimes deciding which ones to use after Shell
identified a target.
"In my experience, banking relationships need to be firmly
managed to get the best out of them," Mr. Longden said in a recent
email. After 12 years at Shell, Mr. Longden is preparing to leave
the company at the end of June.
Before approaching potential targets, say people familiar with
Shell's process, the company often appoints dozens of workers to
quantify potential spending and savings. Before Shell bought the
remaining shares of its own subsidiary, Shell Canada Ltd., in 2007,
it made managers of every potentially affected business group sign
off on estimates of potential "synergies" from the deal, says a
person briefed on the process.
But with BG much larger than prior acquisitions, Shell devoted a
larger team. Last summer, after Chief Executive Ben van Beurden
decided to explore a move, Shell assembled 70 workers. They spent
months poring over finances, Mr. van Beurden told several BG
investors at a recent meeting, according to a person who was at the
meeting.
They prepared a business case, which Mr. van Beurden brought to
Shell's board in March, just after BG's share price fell by about
8% on news of a disappointing project. Soon after, he contacted BG
Chairman Andrew Gould.
Write to Justin Scheck at justin.scheck@wsj.com and Sarah Kent
at sarah.kent@wsj.com
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