international business; Exploring Corporate Strategy CLASSIC CASE STUDIES The Sale of Burmah Castrol to BP Amoco Gerry Johnson

international business; Exploring Corporate Strategy CLASSIC CASE STUDIES The Sale of Burmah Castrol to BP Amoco Gerry Johnson Subject：international business Question and Requirement： Read this case study and use SWOT model to analysis this case。 Case： Exploring Corporate Strategy CLASSIC CASE STUDIES The Sale of Burmah Castrol to BP Amoco Gerry Johnson In 1999, the management team of Burmah Castrol, the lubricants and chemicals business, led by its CEO Tim Stevenson, decided to recommend to the corporate board the sale of the company to BP Amoco. In what follows, Stevenson explains how the company arrived at the point of considering this option, and why the board decided to take it. l l l The Burmah Oil Company was founded in 1886 by Scottish entrepreneurs interested in exploiting newly found oil deposits in Burma. Success there was followed by a milestone investment in an exploration concession across a substantial area of Iran acquired from the Shah. That company, then called the Anglo-Persian Oil Company, later became British Petroleum (BP). Burmah held a major shareholding in BP right through until the early 1970s. Indeed, after a long period operating effectively as an intermediate holding company for BP shares, the management of Burmah in the 1960s used the value of the shares as collateral to embark on an ambitious plan to turn Burmah into both a fully integrated oil company and a substantial conglomerate group. Businesses bought included Castrol and Signal Oil and Gas; other interests included major exploration licences in the North Sea, a substantial fleet of oil tankers and a raft of other activities, including high-street retailer Halfords, various chemicals companies and Quinton Hazell, an automotive component supplier. This period of expansion was brought to an abrupt halt by the recession consequent on the Yom Kippur war in 1974. Much of the company’s subsequent history is the story of how this expansionist drive was gradually unwound, and a new corporate approach and concept developed. THE STRATEGIC DEVELOPMENT OF BURMAH CASTROL Tim Stevenson explained how the portfolio of the Burmah Castrol businesses developed and changed from the 1960s: First there was a process of divestment: selling Signal Oil and Gas, selling the tanker fleet, re-negotiating the Bahamas terminal and selling other peripheral companies like the automotive parts retailer, Halfords and Quinton Hazell. This case was prepared by Professor Gerry Johnson, University of Strathclyde Graduate School of Business, based on discussions with Tim Stevenson, the past CEO of Burmah Castrol, and on published sources. The author is published with the permission of BP Amoco. It is intended as a basis for class discussion and not as an illustration of either good or bad management practice. Not to be reproduced or quoted without permission. Exploring Corporate Strategy by Johnson, Scholes & Whittington 1 ECS_C21.qxd 27/12/2004 11:21 Page 2 The Sale of Burmah Castrol to BP Amoco Over time, and as the process of slimming down progressed, there emerged the concept a twopronged Burmah Castrol, consisting of related businesses. One prong was the Castrol business which, throughout all this turmoil, was continuing to develop as a very successful global business with an increasingly powerful brand. The other prong was Chemicals, which it was planned could provide a substantial counter weight for Castrol. From the later 1970s/early 1980s onwards, a portfolio of speciality chemicals businesses was put together, taking some of the businesses inherited from the past as the foundation and adding to them by buying in highquality speciality businesses as additions to the portfolio. The emerging rationale for Burmah Castrol that resulted was that the Group’s business was the sale and marketing of speciality oil and chemical products. The argument was that we were good at managing Castrol and that we would be able to demonstrate to shareholders and the market that we could also very successfully manage chemical businesses whose style and approach to the market would be in certain key respects similar to that followed by Castrol. We also argued that management had skill in spotting both good managers and sound investment opportunities: the combination would enable all the Group’s businesses to prosper and grow. There was sufficient similarity in terms of key factors for success between Castrol and the Chemicals businesses to enable senior management to add value across the portfolio. The idea that Burmah Castrol, as slimmed down, was a conglomerate per se was resisted. Whilst the process of simultaneous slimming down and building up the chemical portfolio proceeded, the market’s response, as measured by improvement in the share price, was satisfactory. Castrol continued to perform strongly. There was, however, internal questioning, particularly towards the end of the 80s, about where the Group was headed over the medium to long run. There was an argument that Burmah as a two-legged stool needed a third to give it, overall, an appropriate, stable shape. This led to a search for moves that might provide such balance. Included within this search were possibilities for rendering the Chemicals portfolio as a whole more substantial and therefore more able to sit comfortably alongside Castrol. This process culminated in the successful hostile acquisition of Foseco in the early 90s. The opportunity arose because Foseco had lost its way; its share price was very depressed. In fact, as it turned out, the price wasn’t quite as cheap as it might later have become, because economic conditions continued to deteriorate after the purchase. This inevitably affected Foseco’s short-run performance to a greater extent than Burmah Castrol had anticipated. In turn, this meant that it took somewhat longer to achieve an appropriate return on the investment than originally planned. However, vigorous restructuring work on the business and an improved economic environment in due course demonstrated the acquisition to have been sound. But in a qualitative sense the acquisition of Foseco was important because it led to some serious questioning in the market for the first time concerning Burmah Castrol’s overall raison d’être. Was it appropriate for Burmah to be expanding its Chemicals businesses to such a substantial extent? How usefully related was the Castrol business to the Chemicals businesses, and what was the real value in having them in the same portfolio? There were also other issues to sort out in the Chemicals businesses where some were underperforming: work needed to be done to improve their overall operating efficiency. That was a task that was successfully set about and delivered: significantly improved ratios were achieved through cost cutting and effective focus. But that was not enough. The market response was, ‘You’ve improved the performance but what are you going to do now?’ When I took over as chief executive in 1997 a clear message from some substantial investing institutions was that management should not contemplate further substantial expansion – through acquisition – of the Chemicals portfolio. ‘We don’t understand why you bought Foseco. We don’t understand how you think you can add value to acquisitions of that sort.’ Exploring Corporate Strategy by Johnson, Scholes & Whittington 2 ECS_C21.qxd 27/12/2004 11:21 Page 3 The Sale of Burmah Castrol to BP Amoco RECONSIDERING STRATEGY AND STRUCTURE By the mid-1990s Burmah Castrol consisted of Castrol, blending and marketing lubricants; and Chemicals with a residual Fuels retailing business – effectively the final relic of the past – which was in the process of being sold off. Until 1997 Castrol and Chemicals were run as two distinct groups of businesses. From 1997 onwards, for reasons explained below, the corporation was restructured into discrete business units. Exhibit 1 summarises the activities and performance of these business units. In 1994 Mike Dearden, then CEO of the Chemicals businesses, had undertaken a review of the strategy and structure of those businesses. He had inherited a situation in which the acquired businesses still provided the foundation for the structure of his group. Foseco operated as Foseco; Fosroc as Fosroc, Sericol as Sericol and so on; each with its head office and often with subsidiary geographical offices. There had been no attempt within this to sort out a rationale for the Chemicals Group. The strategic review identified an underlying theme of industrial marketing and quality service as the core competences of the successful chemicals businesses. It was clear that the success of these businesses was much more to do with understanding customer needs than the production of chemicals. This conclusion resulted in a move to much greater focus on devolution of responsibility to the market-facing business units. In 1996 Tim Stevenson, then CEO of the Castrol business, also instigated a strategic review of that side of the portfolio. The passenger car engine oil business, which represented 75 per cent of total profits, faced the prospect of more efficient engines requiring longer and longer gaps between oil changes; and therefore of potential long-term volume decline. However, the strategic review was triggered by a short-term challenge: Tim Stevenson explained: In 1996, we had a difficult year in North America after a run of consistently good volume and profit growth; and simultaneously we started to develop worries about long-run developments in the passenger car engine oil business in Europe. Thus we believed we had the makings of a problem in the developed world concerning the sustainability of the sorts of growth achieved in the past in selling growing volumes of high-margin sophisticated lubricants into passenger car engine oil markets. And whilst we had a very successful developing world position, particularly in Asia Pacific, that was unlikely to offer sufficient to offset the difficulties we might be going to encounter over a five-year run – absent of action – in the bigger developed markets in Europe and North America. All this provoked us into having a re-look at what was happening to our passenger engine oil business, what the medium-term market development might look like and what was going to happen to the competitor structure. The conclusion was that our old approach, unaltered, was not going to enable us to continue to grow the business at the rate previous strategic plans had assumed. We also looked at the other businesses; the industrial lubricants business, the marine lubricants business and the commercial lubricants business. The key overall conclusion that emerged was that our internal structure for managing the global Castrol lubricants business was no longer appropriate if we were to optimise our position in each of the four markets. Our old structure had been a geographically based model, with four regional directors, the line managers responsible for over 50 country managers who ran their country businesses, very successfully hitherto, like individual fiefdoms. Within the country they were responsible for all aspects of Castrol’s business, covering all the four market areas, and for sourcing of raw materials, blending, distribution, customer relationships; everything. They had to comply with central instructions in terms of the use of the brand and other broad policy areas but, subject to a relatively small number of rules of engagement, they were left to themselves. A problem was that some of the areas of business were suffering because of the dominant culture of the passenger car engine oil business. So, for example, an opportunity for significant business development was being missed because there was no co-ordinated policy for focusing Exploring Corporate Strategy by Johnson, Scholes & Whittington 3 ECS_C21.qxd 27/12/2004 11:21 Page 4 Exhibit 1 The Burmah Castrol business in the late 1990s Castrol Consumer Castrol Industrial Castrol Marine Castrol Consumer is world leader in the supply of car and motorcycle lubricants and services, marketing to workshops and retail chains, auto accessory stores and petrol stations. Principal products are engine oils, e.g. GTX, transmission fluids and brake fluids. Castrol Industrial is the world leader in supplying metalworking fluid and services to industries such as transport and metal component manufacturers. The business also supplies process industries such as food and beverage, mining, power generation and offshore oil and gas production. Castrol Marine markets specialist lubricants and fluids to the international marine market. Customers range from the largest international shipowning groups, leisure and cruise operators to small fishing boat owners. Castrol Marine provides unique lubricant solutions and essential business information, increasingly through the Internet. Market share 11% Market position 1 World market size 11bn litres Main competitors: Mobil Shell Texaco Market share 6% (metalworking) Market position 1 (metalworking) World market size 12bn litres Main competitors: Fuchs Houghton Milacron Market share 12% Market position 5 World market size 2bn litres Main competitors: BP Mobil Shell Castrol Commercial Foseco Foundry Fosroc Construction Castrol Commercial provides products and services principally to on and off-road vehicle fleets. Off-road business includes vehicles used in construction, quarrying, agriculture and forestry. On-road fleets cover trucks, buses and coaches. Castrol Commercial assists its customers in optimising service intervals, achieving fuel economy and improving engine efficiencies. Foseco Foundry is the world’s leading supplier of consumable chemicals and services to the foundry industry. Foseco’s products are used in the conversion of molten metal into finished castings. This enables foundries to produce castings of high quality, strength and weight whilst improving efficiency and reducing energy consumption. Fosroc Construction provides formulated products for the civil engineering and construction industries worldwide. Products include concrete admixtures to provide enhanced characteristics and greater cost effectiveness; a wide range of cement-based mortars and products and systems to extend the life of concrete structures. Market share 19% Market position 1 World market size £1.2bn Main competitors: Ashland Borden Huttenes-Albertus Market share 2% Market position 5 World market size £6bn Main competitors: SKW-MBT Sika W R Grace Sericol Printing Chem-Trend Releasants Foseco Steel Sericol Printing is the world leader in screen printing inks and ancillary products. It supplies inks to the graphic, textile and speciality markets which include CDs, credit cards and snowboards. Sericol provides its customers with a high level of support, including training, computerised colour matching and environmental services. Chem-Trend Releasants is the world’s largest manufacturer of specialised mould and die cast release agents. Customers range from manufacturers of tyres and car steering wheels to shoe soles for the footwear industry. Each relies on Chem-Trend’s tailor-made formulations and application skills to improve quality, cost and productivity. Foseco Steel’s strong market position has been built on an ability to provide major steel producers with a total package of products and services which are vital to the safe, efficient and cost-effective production of high-quality steel. Market share 2% Market position 5 World market size 11bn litres Main competitors: Exxon Mobil Shell Market share 11% Market position 1 World market size £1.1bn Main competitors: Coates Screen Nazdar Market share 182% Market position 15 World market size £270m Main competitors: Acheson Acmos Wacker Market share 5% Market position 2 World market size £1bn Main competitors: Thor-Didier Stollberg Vesuvius Source: Burmah Castrol annual report. Exploring Corporate Strategy by Johnson, Scholes & Whittington 4 ECS_C21.qxd 27/12/2004 11:21 Page 5 The Sale of Burmah Castrol to BP Amoco on the industrial lubricants business. The conclusion was reached that to optimise performance over the whole business, and to achieve economies of scale, we needed to move away from a geographic structure to one focusing on each of the four areas of Castrol as global businesses in their own right. We made the decision halfway through 1997 and then implemented it in 1997 and 1998. It was a very significant cultural change for the organisation. The old structure had been immensely successful. It had enabled a very strong ethic of customer focus and a strong esprit de corps. If you had the right man in Australia or Vietnam or Brazil, and you gave him his head, he produced strong results. So turning our backs on all of that and sweeping away the country structure was a major move. We originally planned to implement over two years, phasing it in; but in practice the job was completed in just over 12 months. It was done quickly and with minimal disruption. The results didn’t suffer and on balance little of our market-facing customer focus was lost. Furthermore, the early signs were that the substantial benefits that we hoped to achieve from the change would materialise. The logic behind these changes had two main elements. First, it gave the opportunity of unleashing potential in the industrial business and the commercial business and giving marine the proper focus that it needed. But the biggest benefit, second, was that the restructuring enabled a global focus on the passenger car engine oil business. Market trends couldn’t be reversed, of course; but by having a single team to think about how we were going to manage the business globally, to take advantage of economies of scale on a regional and global basis and maximise the potential of our global branding strategy, opportunities were opened up for managing that business much more effectively in what looked as though it would become a tougher environment. Exhibit 2 summarises the financial performance of Burmah Castrol in the late 1990s. THE GOLDEN THREAD In 1997 Tim Stevenson took over as CEO of the Burmah Castrol Group. He was aware that some financial institutions were looking for action at the Group level. They had witnessed and approved the restructuring of the organisation; but there remained bigger questions. I was seen by some as an opportunity to force management to look at the business with new eyes; if you like, through their eyes in terms of how value could be released to them. Our Board had earlier discussed, in general philosophical terms, what management’s objectives ought to be and whether shareholder value should be the driving force of what we were doing. There was complete agreement that that had to be the guiding force. Our share price reached £10 in the early 1990s and hadn’t really moved from that level. It moved to £13 at one point and down to £7 at another, but these were the extremes of a dull range. [See Exhibit 3.] When you have a share price that is doggedly stuck, but you have high-quality assets, there is an imperative to do something about it because, if you don’t, sooner or later the market will find a way of doing it for you – of delivering value to the shareholders. At this time we argued with our shareholders that the rationale for Burmah Castrol lay in our having a ‘golden thread’. Although Castrol and Chemicals were separate entities and we didn’t manage them as one, there were sufficient similarities in terms of the sorts of businesses they were and the way they went to market, to enable Burmah Castrol to add value at the top level. The ‘golden thread’ argument had received qualified support from a study of 21 of the most successful businesses in Burmah Castrol, spanning consumer, industrial and commercial lubricants and various chemicals businesses from different parts of the world. It concluded that the success of most of the businesses was based on competences to do with high levels of service rooted in localised knowledge Exploring Corporate Strategy by Johnson, Scholes & Whittington 5 ECS_C21.qxd 27/12/2004 11:21 Page 6 The Sale of Burmah Castrol to BP Amoco Exhibit 2 Five-year summary of Burmah Castrol financial performance Turnover net of duties: Continuing operations (including acquisitions) Discontinued operations (note (i)) Operating profit before exceptional items: Continuing operations (including acquisitions) Castrol subsidiaries Share of operating profit in associates Castrol Chemicals Fuels Energy investments Central management Discontinued operations Interest Profit before exceptional items and taxation Exceptional items: Continuing operations Discontinued operations Profit before taxation Taxation Profit after taxation Minority interests Profit for the financial year attributable to shareholders Balance sheet Fixed assets Net current assets Total assets less current liabilities Long-term creditors and provisions Minority interests Shareholders’ funds Statistics per ordinary share: Ordinary dividends (note (ii)) Earnings per ordinary share before exceptional items Earnings per ordinary share after exceptional items Shareholders’ funds 1999 £M 1998 £M 1997 £M 1996 £M 1995 £M 2,907.8 35.9 2,943.7 2,761.9 75.2 2,837.1 2,778.6 157.4 2,936.0 2,853.5 206.0 3,059.5 2,751.3 297.2 3,048.5 211.4 1.6 213.0 78.6 1.9 4.0 (13.6) 283.9 0.7 284.6 (25.0) 259.6 185.8 1.6 187.4 71.7 1.7 4.0 (13.3) 251.5 7.3 258.8 (9.5) 249.3 209.6 1.6 211.2 72.8 (0.8) 5.9 (13.6) 275.5 18.4 293.9 (14.2) 279.7 201.4 3.0 204.4 64.1 (0.7) 5.1 (12.5) 260.4 21.9 282.3 (20.9) 261.4 194.7 4.5 199.2 60.3 3.4 0.7 (12.6) 251.0 29.7 280.7 (27.7) 253.0 (76.7) (7.3) 175.6 (79.9) 95.7 (22.7) 73.0 (49.0) 34.7 235.0 (86.8) 148.2 (19.6) 128.6 (24.1) (17.9) 237.7 (92.2) 145.5 (22.2) 123.3 (7.5) 18.5 272.4 (97.6) 174.8 (19.7) 155.1 253.0 (97.8) 155.2 (20.2) 135.0 883.1 309.4 1,192.5 (603.1) (68.7) 520.7 pence 864.6 381.8 1,246.4 (395.6) (62.6) 788.2 pence 839.1 376.9 1,216.0 (391.9) (61.1) 763.0 pence 914.0 424.7 1,338.7 (491.6) (80.5) 766.6 pence 974.5 445.7 1,420.2 (631.4) (80.7) 708.1 pence 47.3 77.0 39.0 291.5 43.0 66.1 60.7 369.4 40.5 75.5 58.0 329.6 36.8 71.1 74.2 332.6 33.45 66.9 66.9 320.8 (i) Discontinued operations relate to the results of subsidiary and associated undertakings discontinued at any time during the five year period under review. (ii) Excluding any Foreign Income Dividend enhancement. of how their product applications could meet customer need. Similar to the earlier exercise on the Chemicals businesses, the conclusion was that success was not so much based on the technical aspect of product as on industrial marketing and service on a local basis. An important exception to this pattern was that part of the passenger car lubricants business which involved sale of product through retail channels. This relied a great deal more on brand and marketing push. The results of the exercise did, however, support the decision to reorganise the Group into market-facing business units. Further, it helped identify appropriate, and inappropriate, roles for the centre. The Group centre of Burmah Castrol should concentrate on developing people with the skills to work internationally but with local sensitivity; but it should avoid heavy-handed central co-ordination. The Corporate Centre was reorganised as a result of this exercise, splitting the ‘corporate’-level activity off from the ‘servicing’ activity which was Exploring Corporate Strategy by Johnson, Scholes & Whittington 6 ECS_C21.qxd 27/12/2004 11:21 Page 7 The Sale of Burmah Castrol to BP Amoco Exhibit 3 Relative performance of FTSE All-Share vs. Burmah Castrol, from January 1995 to July 2000 set up to be market responsive. So if operating companies did not want to buy the services the centre was offering they could go elsewhere. There were, then, arguments that management could use in support of the proposition that Burmah Castrol businesses were linked by a ‘golden thread’: We believed we had a strong story to explain to the institutions what it was we were trying to do, and how we were going to release value. However, as we got into the streaming of Castrol into four separate business streams, this increasingly had an influence on our own thinking about the shape of the portfolio as a whole. Having split out the industrial business from the passenger car engine oil business, it further highlighted, for example, that there might be more similarities between the industrial lubricants business and the foundry chemicals business than there were between, say, the industrial lubricant business and the passenger car engine oil business. So by breaking up Castrol into business units, we had an effect on our own internal thinking. At the same time as this change within the company, a process of major consolidation in the oil industry was under way. We believed this to be a once-off process. It seemed to us that Castrol – its brand and marketing culture – would represent a great prize to a number of the major oil companies because of economies of scale and the broader coverage of the lubricants market that it would provide. This led us to believe that there could be latent potential for releasing substantial value to our shareholders by in some way putting our lubricants business together with another major lubricants business. Thus at this point there were various distinct strands of thinking. At one level we were explaining to the City that management had a clear vision for developing our Castrol and Chemicals portfolio as restructured. At another, we believed we had to explore what routes might be open to us to release the value that we believed was inherent in our businesses but which was not reflected in our share price. Exploring Corporate Strategy by Johnson, Scholes & Whittington 7 ECS_C21.qxd 27/12/2004 11:21 Page 8 The Sale of Burmah Castrol to BP Amoco THE PRESSURE FOR RELEASING SHAREHOLDER VALUE The pressure on management to demonstrate how Burmah Castrol could release more value for shareholders remained; and there was growing concern internally about a need for greater clarity of corporate strategy: The activism from some shareholders continued. When our share price went down to £7.50 there was particularly strong pressure from some shareholders along the lines of ‘We don’t want to strong-arm you but you must do something about this. You are sitting on a strong global asset in Castrol, the value of which is being dragged down by the fact that as management you continue to manage speciality chemicals businesses which are not so highly rated’. And by 1999, internally there was some feedback about the lack of vision in the corporation. We had a series of senior executive briefings in Europe, Asia Pacific and in North America; open and frank debate suggested that senior teams sought a clear banner for the future of the corporation that they could rally round. With half of the profit coming from the passenger car engine oil business, however, it was difficult to provide a really strong argument that would provide an overall cohesive umbrella that people could buy into. It was not possible for senior management to argue that there was something over and above the golden thread – which some were questioning. So at this point we had a combination of some lack of belief internally, lack of belief externally and a possibly time-limited opportunity as a result of oil industry consolidation. In addition, one of our non-executives argued consistently at board meetings that there was indeed a time-limited opportunity to release value to shareholders. ‘If you leave it you will discover that it’s passed you by and the opportunity for releasing value will disappear, and, worse, in some scenarios you will find, as an independent player who has not played a part in consolidation, you are increasingly squeezed by the big players.’ As an executive team we came to a view that we had to explore what opportunities there were for us to play a part in the process of consolidation. Joint venture discussions The earliest conversations we had with a major player in the oil industry were in late ’97 and the summer of ’98. The argument was that at a time of consolidation you need to be aware how the big players may operate in the lubricants market. They have substantial economies of scale. If they should choose to use the advantages of those economies of scale to buy market share through cutting margins in the developed markets, that could seriously affect our business. They can make such cuts and still make good returns because they enjoy economies of scale that we don’t have. If we could establish a joint venture, we would have the possibility of releasing value by locking our brand alongside another major brand, and reaping the benefits of scale. At the same time it could head off the perceived threat to our business from the process of oil industry consolidation. We went into these discussions on the basis that what we had to offer was the premier independent premium lubricants brand in the consumer market and a strongly embedded marketing culture. Our working assumption was that we could achieve value and long-term growth security, by allying ourselves in some way with a major oil company. Discussion about possible structures, however, raised issues about how Burmah Castrol could structure a joint venture for its Castrol business with another major international oil company in a way that would unequivocally put value into our shareholders’ hands. In a joint venture with a major oil company where they would own 50 per cent of Castrol and our shareholders would own 50 per cent of Castrol, what would that then make of Burmah Castrol as a whole? An independent investor in Burmah Castrol would have a 100 per cent investment in a £800m turnover series of speciality chemicals businesses and a 50 per cent share in a major global lubricants business, the other half of which would be owned by a Exploring Corporate Strategy by Johnson, Scholes & Whittington 8 ECS_C21.qxd 27/12/2004 11:21 Page 9 The Sale of Burmah Castrol to BP Amoco major oil company. Our advisers counselled that this would not be acceptable to the market. Any bid premium in our share price would go, and we would be tied in terms of flexibility for what we could do with Castrol. This led to the inevitable conclusion that release of value to shareholders through allying Castrol with another lubricants business effectively meant selling. Other strategic options What was the alternative to such a sale, bearing in mind the value which it could potentially release? The alternative which management developed, in considerable detail, involved breaking the Group up. This acknowledged market scepticism about the coherence of the portfolio. Although the need for radical restructuring was accepted, an issue which management did not fully resolve at this point in the process concerned how the slicing should be carried out. There were two views. One option would be to sell Chemicals, significantly run down the Burmah Castrol head office to those functions needed to support the Castrol business, and be even more radical than we were being in terms of the way the Castrol business was run by taking out substantial cost. This would have involved major rationalisation of the whole supply chain; of the back office infrastructure throughout the world; of the way the portfolio of brands was run. In other words, turning the business into one focused on sales and marketing organisation with most other activity being outsourced. The alternative was a variant on the theme. It was to sell parts of the Chemicals businesses but to keep those that were automotive based. Under this model we might have retained our foundry chemicals business, the Chem-Trend releasants business, the investment casting business and sold construction chemicals, mining, printing inks, cables, wax – all of the things that didn’t obviously fit into an ‘automotive products and services’ model. That would have left us with a business of two parts: a passenger car engine oil business and an industrial-facing business – and with the residual possibility of in due course breaking it into two. Some work was done on the viability of this option. THE DECISION TO SELL On 11 August 1998, BP announced its merger with Amoco and in so doing initiated a wave of consolidation amongst the major oils. This was followed on 1 December 1998 by Exxon’s announcement of a merger with Mobil, which put into play the lubricants business within the BP-Mobil joint venture in Europe. During its early conversations with Amoco, BP had come to the realisation that there remained a strategic gap in its downstream portfolio. The small lubricants business that it would potentially inherit from Amoco in combination with BP’s existing lubricants business simply would not have the critical mass to compete effectively on the world stage. After the Amoco merger, BP either had to consider maintaining a niche tactical presence or perhaps even a total withdrawal from the lubricants business, or seek other opportunities to grow the business into a material globally branded business. The thinking within BP had identified Burmah Castrol amongst others as possible opportunities to help achieve this objective. As this thinking crystallised in mid-1999, the decision was taken within BP to take a significant strategic step in the lubricants sector first by extracting at a minimum its share of the lubricants business from the Mobil joint venture in Europe, and secondly by pursuing exploratory discussions with Burmah Castrol. BP management saw Burmah Castrol as a vehicle for growth, delivering a global brand, world-class marketing talent and significant synergy savings as well as, importantly, growth through brand extension, cross-selling, and access to additional emerging markets. It saw no advantage Exploring Corporate Strategy by Johnson, Scholes & Whittington 9 ECS_C21.qxd 27/12/2004 11:21 Page 10 The Sale of Burmah Castrol to BP Amoco in retaining the ancillary Chemicals portfolio within Burmah and resolved, if an arrangement were reached to acquire Burmah, to divest them as soon as practically possible. In Burmah Castrol too the implications of the likely consolidation in the industry were being considered. Tim Stevenson explained: It was clear that a knock-on effect would be a major change in the status of the European-wide pre-existing joint venture between BP and Mobil. It seemed to us, as part of our approach to examining options for combining our lubricants business with that of one of the majors, that this opened an opportunity. We approached BP with this proposition, and they responded favourably. A team was put together to examine the possibilities. Within Burmah Castrol there was, quite rightly, considerable executive debate about the appropriateness of selling the business. The argument that something had to be done to release value to our shareholders locked up in our business but not reflected in our share price was clearly powerful. Yet there were also considerations of corporate tradition: the fact that Burmah had existed for over 100 years; the fact that we were beginning to develop an aggressive alternative to outright sale to a third party. All acknowledged that there was a point at which we would have to sell. It came down to a discussion concerning the net present value of what management’s alternative ‘go it alone’ option would deliver against the price BP would be prepared to pay. In the event BP’s offer of £16.75 per share had to be set against that value that management’s ‘plan B’ could deliver over time. At the board meeting that decided to recommend the BP bid the board accepted that the company was at a crossroads; something significant had to happen. If the BP bid were not to be recommended then there would need to be a radical change to the shape of the corporation, involving the abandonment of the ‘golden thread’ argument The alternative option on the table at the meeting involved the plan outlined earlier: radical reshaping of the portfolio, together with substantial cost-saving measures and some aggressive new business initiatives. We had modelled this in terms of its impact on the share price over the medium term, assuming successful implementation. The board’s debate concerned management’s ability to carry through a radical new agenda; how quickly success would be reflected in the share price; and how this would stack up against BP’s £16.75 offer. The response from the financial institutions and the press to the board’s decision to accept £16.75 was that it was the right thing to do. Internally, response was inevitably mixed. The initial response in Castrol was broadly enthusiastic. ‘It’s the right thing to do; taking a five-year view as an independent company we’re going to come under increasing pressure. Putting the Castrol business together with the BP business gives us a much greater footprint globally around the world, particularly in Europe but also in the Far East. BP are tougher, harder managers than Burmah Castrol; very rigorous in terms of costs. Castrol needs that. They’ll bring their rigour to sorting out the expense base’. In the Chemicals businesses there was inevitably some sense of betrayal; certainly disappointment and anxiety about who the new owners were going to be. But the Chemicals executives continued to manage the businesses very professionally. Results for the first six months of 2000 were excellent. Perhaps hardest hit were those people in Burmah Castrol head office: the ending of the PLC meant the end of requirement for many head office functions. They were perhaps the people who most felt we should have stayed independent and go our own way; although of course the reality was that had we not sold to BP, our own restructuring plan would likely have put many jobs in jeopardy in any event. In July 2000 Burmah Castrol formally became part of BP Amoco. Most of the corporate board of Burmah Castrol left, including Tim Stevenson, and BP started the process of finding buyers for the Chemicals businesses. Exploring Corporate Strategy by Johnson, Scholes & Whittington 10 PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT :)