Q) Analyze the merger of Indian oil PSUs: IOCL, HPCL and BPCL.

Justify from a Vertical

Integration and value chain strategic capacity perspective of growth. What is the value of the
merged entity?

As per the latest report of the government, 3 Major mergers are happening in the country to
create Mega companies in the Oil industry which are as follows:

1. ONGC-HPCL
2. Indian Oil-Oil India Limited
3. BPCL-GAIL
This 3 mergers would create 3 mega companies in the Oil industry which would be competitive
globally being vertically integrated in multiple segments. While ONGC-HPCL & Indian Oil-Oil
India Limited is a vertical integration story, BPCL-GAIL is a Horizontal Expansion story where one
is Oil marketer & the other is a Gas Marketer.

ONGC is on the verge of acquiring the governments 51.11% stake in oil retailer Hindustan
Petroleum Corporation (HPCL), the government has lined up two more such big mergers under
a grand plan to create three oil PSUs with integrated operations. Indian Oil Corporation (IOC),
the countrys largest company by revenue, is to acquire the governments 66.13% stake in
upstream firm Oil India (OIL) and another oil marketer, Bharat Petroleum Corporation (BPCL) is
to acquire the governments 54.88% stake in GAIL (India), the dominant gas transporter and
marketer. The other 2 mergers would happen once the ONGC-HPCL merger is completed and is
successful to not make any major mistakes.

There are 2 major reasons for the merger of the following companies:

1. Acquiring Resources & Capabilities

By going for vertical integration, each company that is acquiring a new company would gain
a new capability which didnt have like ONGC would now have significant new capability to
Distribute & market as well as refining of Oil.

2. Cost Economies & Market Power

By increasing gaining new abilities, the companies would now achieve better economies of
scale and they would now be able to negotiate prices in the global market as well as absorb
cost inefficiencies of the system.

The idea is to merge Upstream Oil companies with the downstream oil companies to create an
integrated Oil company which would allow it to will give them capacity to bear higher risks, avail
economies of scale, take higher investment decisions and create more value for the
stakeholders. Also this would better the ability of the companies to bargain prices of Oil in the
Spot markets across the world. This is in line with the global practice in Oil industry where
integrated company can better absorb the price fluctuations in the market and consistently
maintain good profits over a period of time. Eg. BP, Shell.

The rough estimation of the value of the combined ONGC-HPCL can be estimated at Rs.879
billion.