Crude oil and natural gas are major commodities traded in international markets. Refined products are used in a variety of ways, such as motor fuel (which is the most significant product derived from crude oil) and power generation. Broad research exists on how the oil market is Influenced by price and demand, and its interactions with the world markets (Jiméez-Rodriguez R. and Sancchez M. (2004), “Oil Price Shocks and Real GDP Growth: Empirical Evidence for Some OECD Countries”). Differences exist on how the economic trends affect the Oil & Gas sector depending on the geographical area. For instance, the recent crisis is proving to be less harmful on the emerging markets , concerning the Energy sector (cfr. Charts below [1] ). This trend is observable by looking at the MSCI Energy Index and its components divided by geographical area (“World” and “Emerging Markets”). The World index lost more than 6% since 2007 both in the broad energy sector and in the Oil & Gas industry. On the other hand, the impact on the emerging markets was weaker: from the levels of 2007, the Emerging Markets index lost less than 0,5% with regard to the broad Energy Sector and less than 0,2% with regard to the Oil & Gas industry.

Emerging countries are becoming the more and more important in today’s economy. Their rising strength not only impacts macroeconomics fundamentals, the wealth of their people and their political influence, but also the growing interest of M&A activity. Although this trend has begun long ago, the research on this topic is still lacking. Mainly, research on the creation of value of mergers and acquisitions focuses on domestic deals in developed countries, or in cross-border deals where the acquirer company is based in a developed country, mainly the US (Trahan, 1993, and Sorenson, 2000), United Kingdom (Hay and Liu, 1998) and European Countries (Luypaert and Huyghebaert, 2007). Few research has targeted emerging markets. For example, Kale (2004) has developed a research on Indian companies. Furthermore, research on deals from Emerging Market companies to developed countries is at an early stage (Chari et al., 2009). Furthermore, few research is focused on one singular sector. It is generally argued that M&A come in waves [2] , and that there are characterising factors for each industry as outlined by Koetter (2005), “Evaluating the German Bank Merger Wave”. The aim of this paper is to build on what has already been done, in order to deepen academic knowledge on the subject and to put the basis for future research.

As the drivers and value creation of M&A deals may differ from one industry to another, the paper will focus on the Oil & Gas industry. As Andrade et al. (2001) points out, given that mergers come in waves and that in each wave we find a different industry composition, we should deduct that, at least in part, M&A deals might be influenced by shocks which are specific to an industry. Also, Mitchell and Mullherin (2000) links M&A trends to factors such as the oil price. The research developed by this paper will prove of particular interest, as the oil prices have been importantly unstable during the last years, after a long period of stable growth.

The analysis will be based on a sample of relevant deals registered from 1980 to 2009 involving at least 50% of capital. These deals have been selected in the Oil&Gas mid industry. For the list of deals, we used the database of ThomsonOne Banker. For the financial data, we used instead the database provided by Datastream. For part of the analysis, Stata has been used. Further indication on how we analysed the sample are in the Methodology section of this paper.

In Chapter 1 the paper will give an introduction to the Mergers & Acquisitions industry, providing a short description of the phenomenon of the so-called “M&A waves”, and of the main motivations which drive external growth for companies. A brief preamble on the Oil & Gas industry will be given, in order to outline the main dynamics and players. In Chapter 2, the paper will take into exam previously existing literature on M&A deals and value creation, putting the basis for a further analysis. Chapter 3 will deal with the main hypothesis which are the foundation of this research. In Chapter 4, the methodology will be presented, together with an analysis of the data included in the sample studied in this paper. Chapter 5 will then show the results of the analysis. Chapter 6 will finally draw the conclusions.

RESEARCH QUESTION

In the last decades the mergers and acquisitions activity has become a two way process: instead of going only from developed countries to emerging economies, always more acquirer companies are based in the so-called emerging countries and are seeking external growth towards developed countries.

Since 2001, for example, the share of US inbound M&A as a percentage of total cross-border M&A increased from about 6% to almost 8%, while US the share of US companies of outbound cross-border M&A declined from more than 7% to 5% (Zenner et al., 2008). Historically, M&A activities wave following economic cycles. Exhaustive research (Andrade et al., 2001) shows that, within each wave, the trend of M&A varies by sector. Further research on this topic is lacking, and the purpose of the paper is to start investigating on the drivers for value creation in a specific sector, namely Oil & Gas.

This research aims at studying the determinants of value creation of M&A deals by focusing on the Oil & Gas industry. Its objective is to determine whether mergers and acquisitions create value, and to analyse this from an operational point of view. The main question is if these deals really create value, in terms of profitability.

Do the operations of mergers and acquisitions create value in the oil sector in terms of operational profitability?

Is this marginal operational profitability statistically significant?

In order to measure operational profitability, in this paper it will be used the EBITDA/Total assets indicator.

MOTIVATION

I decided to conduct a research on the subject of M&A deals in the Oil & Gas industry because of my previous professional experience in this field. I completed in fact an internship within Natixis in Paris in the Structured and Commodity Finance department, working on Africa and Middle East on the Oil markets. Previously, I completed an internship within the Equity Research and Strategy Team at UniCredit CAIB in London, working again on the emerging markets, this time on the EMEA region.

I thought that it would have been interesting to study whether M&A deals in this industry create increase operating performance, and which are the main drivers. Initially, I intended to focus on those deals where the acquiror (or its ultimate parent) comes from one of the so-called emerging markets. However, it was impossible to have a statistically significant sample to analyse, because many information was missing (e.g. financial data such as EBITDA, Total assets, or other precious information such as the attitude of the deal, the method of payment, etc.). As I could not have access to databases other than ThomsonOne Banker and DataStream, I decided to enlarge the scope of the analysis to the whole Oil & Gas industry, in order to be able to analyse the profitability of mergers and acquisitions completed by such companies. I think that this study is interesting also because focused research on this industry is lacking. There is in fact almost no research on post-deal operating performance of companies in the Oil & Gas industry.

Furthermore, personally, I found it useful not only for the knowledge it gave me about value creation of mergers and acquisitions, but also because it gave me the opportunity to use a statistical software aimed at data analysis, Stata, which has been crucial in the analysis which has been carried out.

BACKGROUND

An introduction to M&A

After the last wave of mergers and acquisitions at the beginning of the new century, the number and the value of deals has decrease substantially due to the crisis which