You can scarcely blame Mobil Corp. for trying. There was Marathon Oil sitting there like a $50 bill lying on the sidewalk. Who wouldn't be tempted to pick it up?
But there were some strings attached.
Because of the size of the two oil companies, because the economics in the industry suggest similar combinations if the Mobil-Marathon merger is consummated, because of Mobil's image in many circles as the predatory bad guy, sirens and bells went off.
If Mobil is allowed to succeed, the cry went up, it will be open season. Critics warned that major oil companies would stalk the United States, taking over smaller companies and radically restructuring the oil industry. Big Oil will become Bigger Oil.
Now the question of whether Mobil will prevail is muddled. For the time being, U.S. Steel appears to have the edge because of an unfavorable court decision based on allegations that the Mobil takeover would violate antitrust law. A federal appeals court in Cincinnati refused Thursday to set aside the lower court ruling pending a hearing, but if continuing legal battles result in a reversal of that decision, Mobil--and other oil companies--could give U.S. Steel a run for its money. At week's end, Mobil was seeking to transform its offer into a joint venture with another oil firm in still another attempt to overcome antitrust objections to its bid.
Whether Mobil succeeds or not, its attempt has heightened concern over takeovers in general and concentration in the oil industry in particular. In Congress, that concern has produced proposals for moratoriums on takeovers by oil companies.
Sen. Howard Metzenbaum (D-Ohio) has a long-standing proposal to slap a 10-year moratorium on takeovers of large firms by 16 major oil companies. A bill introduced by Rep. Clarence Brown (R-Ohio) in response to the Marathon-Mobil fight would bar major oil companies from acquiring more than 5 percent of the stock of a "mid-size domestic oil company" until a cabinet-level evaluation of such mergers is completed.
The first recent record-breaking oil industry merger was Shell's 1979 takeover of Belridge Oil for $3.65 billion. Then there was second-ranked Mobil's bid to take over ninth-ranked Conoco. If that bid had succeeded, the $8.82 billion transaction would have been the largest takeover ever. Mobil lost out to Du Pont, which eclipsed the Shell deal at $7.54 billion. Mobil's most recent offer for Marathon--$6.5 billion--would be the second-highest price paid for a corporate acquisition.
In the slightly more than four years between January 1977 and March 1981, the top 20 oil companies were involved in 74 acquisitions and 12 mergers, the Congressional Research Service found. Most of the dollar value of those combinations--57 percent--was represented by mergers with or acquisitons of energy companies. And Fortune Magazine reported that 43.3 percent of the $35.7 billion worth of mergers in the first half of 1981 was in oil, gas, mining and minerals.
Takeovers of energy firms by other energy concerns have only been a part of a much larger "merger mania" that has provoked questions about whether corporate money was being spent on acquisitions rather than on investment and modernization to increase productivity. On top of that, oil combinations raise the spectre of increased control of that critical market by a handful of powerful firms.
The scenario painted by industry analysts and others is that if Mobil is allowed to acquire Marathon, or if the administration signals that it won't oppose such combinations as a matter of course, similar mergers will follow.
The so-called "middle tier" of oil companies whose revenues generally hover below the $10 billion mark is full of potential takeover targets. Companies frequently mentioned as vulnerable include Cities Service, Getty Oil, Kerr-McGee, Pennzoil, Sun, and Union Oil. Both targeting and targeted companies have lined up billions of dollars in credit to wage and fend off takeover fights.
If a green light is given, "there is a clear possibility we will be in for a spate of mergers," according to Sanford Margoshes, oil industry analyst for Bache Halsey Stuart Shields Inc.
"Companies in the business of developing hydrocarbons are finding it increasingly expensive to produce them," he said. "If they want to stay in the business with which they are familiar, they have two options. They can increase the amount they are spending on development and exploration , which many companies do. Or they can go out and acquire reserves that are already discovered."
The stocks of the middle-tier companies, including reserve-rich Marathon before Mobil's bid, have been trading at prices low enough that buying the companies amounts to buying new barrels of oil for a third to a half the cost of finding a barrel through exploration.
"One of the problems in the industry for the middle-tier companies is being worth more dead than alive," said Albert J. Anton Jr., a research partner at Carl H. Pforzheimer & Co.
The cheapest place in the United States to drill for oil is on the floor of the New York Stock Exchange, both critics and advocates of the oil company mergers concede.
Even the sweetened offer Mobil has made for Marathon works out to an average price of about $108 a share--considerably less than the $180 per share at which Mobil evaluated Marathon's worth.
Those are the reasons for a general expectation that a successful Mobil bid would begin a round of takeovers of the middle-tier firms. Harder to answer than why it would happen are questions about the consequences.
Oil industry economists describe the industry as generally competitive. "At the present time, the oil industry looks pretty unconcentrated compared to manufacturing," said Leonard Bower, deputy director for policy analysis at the American Petroleum Institute. "Even if you have some slight increase, it will still be relatively unconcentrated."
According to API documents, the industry has become less concentrated in recent years. "In 1970, the top four oil companies accounted for 26.3 percent of oil production; in 1980, the latest figures available, the top four firms accounted for 25.3 percent."
The API also notes that the largest natural gas producer accounts for 6.4 percent of the market, with the largest four accounting for 19.2 percent and the largest eight accounting for 30.6 percent. The leader in gasoline sales sells 7.6 percent of total sales, with the top four accounting for 28 1/2 percent and the top eight accounting for 49.3 percent. The largest refiner has 8 1/2 percent of refining capacity, while the top four have 29 percent and the top eight have 49 percent.
On the other hand, Marathon won at least initial success in persuading a federal judge that certain markets must be defined locally rather than nationally. "Mobil admits that its proposed acquisition of Marthon would make Mobil the largest marketer of motor gasoline in the United States with almost 10 percent of the national market," U.S. District Judge John M. Manos said in his memo of opinion.
But Manos' concern focused on smaller markets. "The persistence of price differentials in various areas of the nation demonstrates that motor gasoline does not move from area to area in response to price changes easily or as readily as Mobil asserts," Manos said. "Rather, they indicate that the relevant geographic market for motor gasoline is something less than nationwide."
Figures compiled by the respected Lundberg Letter indicate that in 31 of the 50 states and the District of Columbia, the two top firms account for 25 percent or more of gasoline sales.
Ironically, the refining and marketing operations of the smaller petroleum companies--the parts that are most likely to raise concerns about antitrust and concentration--are not among the attractions these companies hold for larger firms. It is the oil and gas reserves of the smaller firms that are being sought, not the bothersome downstream operations.
The middle-tier companies are "the major suppliers to independent brand marketers," said Frederick M. Scherer, an economist at Northwestern University and former director of the Federal Trade Commission's bureau of economics. Scherer testified for Marathon on the antitrust implications of the Marathon bid.
While the big eight oil firms provide little to independent marketers, small- and mid-sized firms supply those retailers as well as marketing some gasoline on their own, said Scherer. "Because of the incentive structure of the industry, the independent marketer segment would at least dwindle if the middle tier disappeared," he said.
Refineries too small to be gobbled up are likely to disappear for other reasons as they confront a world without "the artificial stimulants of allocations and entitlements" that allowed them to spring up, he said.
Most of the concern about concentration in the oil industry on Capitol Hill has centered on fears that money and energy being spent on acquisitions is being diverted from oil and gas exploration and development.
Congress and the administration have provided tax breaks and deregulation for the oil industry on assurances that such benefits would make the United States more energy independent, noted Rep. Toby Moffett (D-Conn.) in a recent hearing on Mobil and Marathon. "This policy can never work if its major product is merger and more merger," he said. "So far its major product is energy concentration, not production.
"Major oil companies, typified by Mobil, in its effort to acquire first Conoco and now Marathon," said Moffett, "are tying up billions of dollars of cash and credit in a game of corporate concentration that does not contribute one drop of oil to America."
There is another view, however. Shell's merger with Belridge has increased Belridge's production from 40,000 barrels a day to 68,000 barrels a day. Shell projects production of 104,000 barrels by the mid-1980s. Shell's resources and management expertise appear to have made the difference in that case. Unlike Marathon, Belridge had no marketing and refining operations to complicate the merger.
If Mobil takes over Marathon, that merger, too, may result in increased production. According to analyst Osmond Erlap of Bache, Mobil has tremendous potential for exploration because of the acreage it holds. "It could use the cash flow from Yates Field nicely," he said. Yates Field, Marathon's "crown jewel," is the major portion of the smaller firm's oil and gas reserves.
Mobil, with "one of the most exciting exploration departments in the industry," could reap huge benefits out of Yates Field, Erlap said. "Mobil's only real restraint on capital expenditure plans is cash flow." Acquiring Marathon could remove that barrier to more exploration and development.
"I can see a number of mergers, but that doesn't necessarily mean there's going to be a dramatic restructuring of the industry," said Margoshes of Bache. "The large companies will continue to be the large companies, and the independents will continue their role as innovative finders of oil. The larger independents, because the stock market has not priced the stock at its value, are sitting ducks."
"From a public-policy point of view, the disappearance of middle--tier companies would probably be bad," said Anton of Pforzheimer. "I don't think the stucture of the industry from a competitive point of view will be that different, but to have more operators out there with different ideas on how exploration should be done is a good idea," he said.
"If we're down to the Seven Sisters, there will just be fewer options for new ideas in the industry," he said. The smaller firms will still be there, but "they don't have the resources to think of the expensive new ideas."
If there is disagreement over the potential impact of more mergers in the oil industry there is sharper disagreement over where the government should intervene.
"It's not a question of saying there is a clear line and once we cross it, it's awful," said a congressional committee staffer who works for Moffet. "The point is we're in a progression."
The question is whether government adopts an antitrust standard appropriate to the 1960s or to the 1980s, said Erlap. In the 1960s when the economy was growing, "the attitude of curbing potential concentration in its incipiency was acceptable," he said. Now, with a greater need to increase productivity, another standard may be the answer, he said.
"It's going to take this country a long time to redefine its thinking about economic growth," Erlap concluded. While some people may view Mobil as "arrogant and brutish, it is forcing people to consider these issues."