Christian Stadler, Associate Professor of Strategic Management, believes Shell’s acquisition of BG Group for £47 billion could pave the way for a number of similar big money mergers.

Royal Dutch Shell’s acquisition of gas group BG is the energy sector’s biggest deal for a decade and will create a company worth a reported £180bn.

Dr Stadler suggests Shell initially missed out on a wave of mergers in the late 1990s, but has now seized the opportunity to capitalise on a return of low oil prices much like those that initially spurred on the mega-merger wave of that decade.

He said: “Shell missed out on the late 1990s mega-merger wave due to their internal structure. Back then they had cross-shareholding in the UK and Holland, and though they had informal discussions with Mobil, who would have preferred Shell rather than Exxon, it was just too complex.

“This time round they don’t have any such issue, they are a more normal UK plc., with no shareholding in Holland.”

The oil price has once again plummeted just like in the late 1990s, although back then it reached a figure as low as $10 a barrel.

Now it is at around $50. And, with increasing cost pressures, acquisitions are an obvious way to maintain growth according to Dr Stadler, hence the fact there has already been some M&A activity in the oil service sector.

Dr Stadler believes while Shell was too late with its acquisitions in the US shale boom, consequently missing out, it has been quick to make the first move in what could be a new wave of mega-mergers in the sector.

“BG fits well with Shell’s portfolio. Shell has a very good track record in offshore oil and gas fields, and BG will help them solidify this area. Also their replacement ratio – that is the amount of oil fields they have lined up to replace the oil they are producing - has not been very good,” added Dr Stadler.

“Acquiring BG will help them do this and although Shell is one of the most globalised companies around it will help it expand into East Africa and increase its Brazil operations.”

Professor Stadler believes this latest merger is not without its potential downsides however.

“On the downside: never underestimate the issues associated with mega-mergers. Shell’s relatively decentralized approach is an advantage here but also reduces cost-cutting potential,” added Professor Stadler.

“Shell gives lots of freedom to its different entities, usually country operations, so it could give BG substantial freedom. The downside of this approach is that the cost savings are much harder to achieve, though with the current downsizing in the oil industry you would expect some job loss.

“Will this be the opening shot in a new wave of mega-mergers like the 1990s? Quite a few oil companies are under cost pressure with no sense of the oil price recovering. Companies had got used to $100 a barrel, and many need $40 to $60 to break even so we could see more of these deals.”

Dr Christian Stadler teaches Strategic Advantage and Strategy and Practice on the Warwick Executive MBA and Strategy Analysis and Practice on the MSc Management. He is also author of Enduring Success. 

Image courtesy Shell: Flickr