One of the reasons to invest in large profitable companies is they either have a moat (barrier to entry) or a near monopoly which allows them to raise prices on a regular basis. The increase in prices translates to increased revenues and protection of the profit margin which benefits the shareholder. When a large company does a merger, often times a government agency will be examining it to ensure the competition still exists. In the mind of the executives there is always direct and indirect competition because the public does have choices.

In an article by Diane Bartz and David French of Reuters, Exxon the biggest oil company in the US announced a merger with Pioneer Natural Resources of $60 billion for an all stock deal. The President and founder of Pioneer Natural Resources would be working for Exxon. On the political scene, the White House including the President want lower gas prices for consumers to help keep inflation down. What will gas prices do? The reporters talked to 5 antitrust lawyers and they believe the deal will go through.

The Federal Trade Commission (FTC) is likely to face an uphill battle to challenge the acquisition. The reason the oil and gas companies argue that they do set the price of the commodity (in this case oil and gas) but the price is set by supply and demand forces in a vast global market.

Andre Barlow, an antitrust attorney with Doyle, Barlow and Mazard PLLC, said the deal with Exxon and Pioneer is related to production and exploration and will be easier to defend. Exxon was to increase its production in the Permian basin, not decrease.

The FTC has not challenged a major merger of oil and gas producers since BP $27 billion acquisition of Atlantic Richfield in 2000. The FTC agree to drop its objections after BP offered to divest oil production acreage in Alaska.

The Permian basin spans west Texas and eastern New Mexico, Pioneer has 9% of gross production, while Exxon is number 5 with 6%, according to RBC Capital Markets.

The FTC allowed Chevron to complete an acquisition of PDC Energy and now Chevron has 40% of the Denver-Julesburg basin.

David Kass, a finance professor at the University of Maryland and former FTC antitrust economist said regulators have to show they have conducted a thorough analysis of Exxon’s deal for Pioneer.

Linking to dividend paying stocks, when large companies do mergers and acquisitions they have to fact in both the economics of the deal and the political reality. In some governments, the administration encouraged or did not stop mergers, in other administrations there was going to be a review by the government. Large companies and the association play a role in financing of politicians, but that does not mean they automatically approve what the large companies want to do. In politics, people want to be re-elected and sometimes political considerations can vary. With any merger, the why does the company want to do it is the issue.

There are more questions than answers, till the next time – to raising questions.