Accountants guide oil merger

John Buchanan, BP’s finance director has revealed the key role the finance teams of BP and Amoco played in last weeks merger.

Although keen to play down their significance, Buchanan says finance teams on both sides of the Atlantic steered chief executives Sir John Browne and Larry Fuller to a done deal.

The result is a merger that ensures the best possible picture on the balance sheet, is tax efficient and barely touches on monopoly legislation.

Most observers will say they recognise a takeover when they see one, but the deal will actually be counted as a merger under UK accounting rules. Jeremy Wilson, a project manager at JP Morgan in London which advised BP on the merger, explains: ‘The deal has merger characteristics and the companies expect to get a merger. UK law specifies a limit of 60:40 for it to be called a merger.’ That is what BP will look to prove to regulators in the key areas of cashflow, income or production. ‘It is 60:40 to a plus or minus on accounts,’ says Buchanan.

Under UK accounting rules, merging the companies rather than mounting a takeover means the new company can write off goodwill against its reserves rather than amortise them against profits. This avoids the danger of reduced reported earnings per share. ‘We are confident that the merger meets US GAAP regulations,’ says Amoco’s chief financial officer John Carl.

The deal won’t feel the brunt of antitrust authorities because, according to Buchanan, there is little overlap. ‘One powerful factor is that they are economically complimentary,’ adds Buchanan.

But he explains that the only area where they are really likely to be hit by legislation is in the downstream[???] ie marketing and refining in Ohio and the MidWest.

His confidence is probably founded on the recently successful European marketing joint venture with Mobil which drew little sting from regulatory authorities. JP Morgan’s Wilson adds that the large number of big oil players like Exxon and Shell ensures little impact.

He says the merger follows a strategic view of bringing complimentary interests together. ‘They are big in US refining, marketing and we are strong in Europe. We bring two complimentary chemical companies together. They are strong in gas, an area of our portfolio which needs bolstering.’ But he said: ‘You can’t gauge how authorities see this.’

Wilson says: ‘It shows transatlantic deals are much more accepted by the market’.

Another element of the deal is the large amount of work undertaken by in-house finance teams that speeded up negotiations and reduced the potentially excessive corporate finance bill. Buchanan says the advisory bill won’t exceed $100m (#62m). ‘But whilst the talks are still going on, lawyers fees are still ticking over,’ he adds.

Buchanan claims restructuring itself will cost around $1bn compared to the savings of $2bn they are trying to reach by 2000. ‘We believe that costs attached to the merger to be less than #1.6bn over the next two years,’ adds Wilson.

A figure of up to 6,000 redundancies has been mooted but Buchanan is keen to stress there will be relatively little impact in the UK. ‘Until we get to detail is hard to know what the figure will be.’ His vision of the future firm will include a centralised finance function with him clearly at the top.

But while he says ‘an integrated view of finance is common to both companies’, Buchanan’s supremacy is firmly underlined by the departure of Amoco’s younger counterpart John Carl.

Buchanan says he didn’t know Carl very well until the chief executives, Browne and Fuller suggested they get together. He says: ‘I went to New York with head of corporate counsel Peter Bevan and head of tax Peter Chapman.’

They met US counterparts twice in July in a JFK airport meeting room. ‘You can get four hour meetings in New York if you take the morning Concorde in and the afternoon Concorde out,’ he says.

Stepping into the top finance role of the merger company is a triumph for the 55-year-old New Zealander who has spent all his working life at BP. The fact that it involves possibly one of the most famous British corporates is all the more amazing considering he only came to the UK to undertake doctoral research in chemistry at Oxford.

The New York meetings were followed by a steady burst of transatlantic telephone conversations in which, according to Buchanan, the two companies recognised shared values. This was followed by more focused liaisons between the finance, tax and legal teams. Carl says: ‘The BP guys I saw the most were head of tax Patrick Chapman, treasurer David Watson and chief accountant Mike Stahy.’

The result is the world’s largest merger, on BP’s terms. ‘John Browne may have been the project leader but John Buchanan and treasurer John Watson made sure it came together in a co-ordinated way,’ says Wilson.

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