Merger in the Petroleum Industry: The MobibMarathon Case (1981)

Introduction
On October 30, 1981, the Mobil Corporation announced a tender offer to purchase
common stock shares sufficient to obtain control of the Marathn Oil Company. The
tender offer was to proceed in two stages. Up to 40 million of Marathns 60.1 million
shares were to be purchased for $85 each cash, and if at least 30 million shares were
obtained, the remaining shares would be traded for debentures worth $85 each. At the
time of the offer, Mobil had already purchased 178,000 Marathn shares.
Marathns directors were not eager to see their company acquired, especially by
Mobil. They believed Marathn had performed well; they saw no reason why Mobil
would manage the company better than it had been managed, and they concluded
that the takeover was not in the interest of Marathn stockholders. They also feared
that following a merger, Mobil would cise or cut back sharply Marathns
headquarters operations, which accounted for 10 percent of total employment in the
companys Findlay, Ohio, home. As part of an effort to thwart the takeover, Marathn
filed on November 1 an antitrust suit charging that the merger would lessen
competition in diverse crude oil, refined product, and oil transportation markets.
The Adversarles
Mobil Corporation was at the time the second largest United States industrial
Corporation in terms of sales. Originally incorporated in 1882 as the Standard Oil
Company of New York, it was broken off from the Standard Oil trust following a 1911
antitrust judgment. It expanded out of its original New York New England home
territory to become the fourth largest refiner of petroleum producs in the United States
by 1980, originating 6.3 percent of total U.S. motor gasoline sales. It also established
a strong international presence, among other things joining the Arabian American
Oil Co. (ARAMCO) Saudi Arabian crude oil franchise in 1947. With mergers and other
changes, its ame evolved to Socony-Vacuum (Socony stood for Standard Oil Co. of
NY) in 1931, Socony-Mobil in 1955, and sim- ply Mobil in 1966.
Marathn was also a divested fragment of the Standard Oil trust. It began in 1887 as
the Ohio Oil Co., exploiting crude oil discoveries in the Findlay, Ohio, area. After
divestiture, it moved into refining and crude oil operations in other pars of the United
States and later other nations. Its ame was changed to Marathn Oil in 1962. In 1980,
it was the thirty ninth largest U.S. industrial Corporation ranked by sales and the ninth
largest domestic petroleum refiner, with a 3.7-percent share of nationwide gasoline
sales.
Why Mobil Sought Marathn
Despite its history and size, Mobil had a problem. With sharp increases in the taxes
levied by Saudi Arabia on the oil ARAMCO members shipped, Mobil had been
effectively expropriated from its richest crude oil reserves, receiving little more than a
modest perbarrel Service fee. Moreover, in its home market, Mobil was relatively
crudepoor. Its U.S. refineries had a capacity to process 860,000 barris of oil per day,
but its U.S. crude oil reserves were sufficient to cover only 37 percent of that volume.
Its proven domestic crude reserves had an expected life of only 6.5 years at 1980 pro-
duction levels. Mobil was anxious to acquire additional domestic crude oil reserves
that would be safe against supply interruptions for example, a crisis in the Middle East.
In 1979 and 1980, it acquired two medium-size domestic crude oil producing
companies. During the summer of 1981 it made an $8.8 billion bid for Conoco, Inc.,
but lost out to the DuPont Company. Marathn was the next step in what carne to be
called its search for oil on the floor of the New York Stock Exchange.
Marathn was in a quite different position. Excluding a new Louisiana refinery
designed to process imported sour (high sulfur) crude, its 168,000 barris per day of
North American crude oil production satisfied (mostly through swaps with other
crude-holders) half of its refineries needs. Marathns crown jewel was a 49 percent
interest in the Yates Field of West Texas, which regularly produced 125,000 barris
per day (for all owners, not merely Marathn) and was believed able to sustain a daily
output of 150,000 barris.2 Discovered with a 1926 gusher, Yates was the United
States second largest oil reservoir (after Prudhoe Bay). Its deposits, located only 2000
feet beneath the earths surface, had already yielded 900 million barris, and
Marathns conservatively rated share of the remainng reserves amounted to at least
a billion barris enough to support 1981 production levels for another forty four years.
Marathn also obtained 35,000 barris of oil daily from deposits in the Big Hora Basin
of Wyoming, and 24,000 barris per day from the Cook Inlet in Alaska, and had
additional interests in other parts of the United States and in Caada, the North Sea,
Libya, Abu Dabi, and Nigeria.
At the time of Mobils tender offer for Marathn, crude oil was selling for approximately
$35 per (42-gallon) barrel in the United States. An internal study by Mobils nance
staff estimated the valu of Marathns domestic crude oil reserves alone (excluding
refineries, pipelines, and other facilities) to be as high as $180 per share of
outstanding Marathn com- mon stock, assuming a continuation of existing world
supply and demand conditions.3 During 1981, before Mobil announced its acquisition
offer, Marathns shares had traded on the New York Stock Exchange in the range of
$45 to $80 per share. On the day before Mobils announcement, Marathons stock
closed at $63.75. Thus, with its $85 per share offer, Mobil sought to augment its crude
oil reserves at bargain prices. Marathons management and employees, however,
wanted no part of the bargain, so the company filed suit on antitrust grounds to enjoin
Mobil from consummating its offer. A preliminary injunction hearing commenced
before the Federal District Court in Cleveland, Ohio, on November 17,1981, less than
three weeks after Mobils tender offer announcement.
The Market Definition Question
The Celler Kefauver Act of 1950, which amended the Clayton Antitrust Act of 1914,
States that no Corporation engaged in commerce shall acquire the stock or assets of
another such Corporation where in any line of commerce in any section of the country,
the effect of such acquisition may be substantially to lessen competition, or to tend to
create a monopoly.
From the statutory language and subsequent Supreme Court interpretations, the
typical horizontal merger case turas on two factual points:
The boundaries of the relevant market that is, the line of commerce and section of the
country; and Whether the merger sufficiently changes the relevant markets structure
so that competition is substantially lessened.
Relevant market questions are in tura divided into two parts: what the product market
is, and what geographic bounds that market should encompass. Although other criteria
also come into play, Supreme Court decisions interpreting the Celler Kefauver Act
have emphasized the magnitude of the market shares merged in determining whether
a merger threatened substantially to lessen competition. In 1968, the U.S.
Department of Justice published a set of Merger Guidelines indicating the
concentraron changes that would cause the Department under normal circumstances
to challenge a merger as anticompetitive.4 For markets with four firm concentration
ratios below 75 percent that is, in which the leading four sellers combined market
shares were less than 75 percent of total industry output a challenge was said to be
likely if the acquiring firm had a market share of 4 percent or more and the acquired
firm had a market share of 4 percent or more, or if the acquiring firm had a market
share of 10 percent or more and the acquired firms share was 2 percent or more.
Although such guidelines have no legally binding forc, they could be, and often have
been, accorded significant weight by trial courts.

Joining the Issues

In its complaint, Marathn alleged that competition would be lessened in diverse motor
gasoline markets and in crude oil transportation, crude oil exploration, product terminal
Services, and oil shale research and development. However, as is common in
preliminary injunction hearings, the November 1981 proceeding in Cleveland was
conducted on an expedited basis, considering only the evidence that could be
assembled in three weeks time and scheduling testimony from witnesses for only four
days. Given these time constraints, the dispute focused on a narrower question
whether competition would be lessened in the sale of motor gasoline.
Emphasizing the consumere side of the picture, Marathns expert economist witness
viewed gasoline as a meaningful product market, since the person who pours diesel
oil into his or her gas-buming automobile is going to have very serious difficulties.
Mobil responded that within certain limits imposed by the flexibility of refining facilities,
gasoline and other oil producs were substitutable in production, even if not in
consumption. But there was no substantial dispute over the appropriateness of
gasoline as a product market in the antitrust sense, and the District Court accepted
that product market definition.
Much more heatedly contested, and indeed central to the case, was the question of
whether the relevant geographic market was national, as alleged by Mobil, or whether
the markets were more narrowly constricted to metropolitan areas, States, and regions
of the United States, as asserted by Marathn.
If the geographic market for gasoline were the entire United States, or even the area
east of the Rocky Mountains the narrowest definition accepted by Mobils economist
the impact of the acquisition on the structure of the industry would almost surely be
too small to support an antitrust challenge. The combination of Marathn with Mobil
would give Mobil a combined national market share of approximately 8.5 percent,
propelling it into first place among American gasoline producers, But with a national
market definition, as shown in Table 1-1, the gasoline industry was not highly
concentrated before the merger, and the four-seller concentration ratio would rise from
31.4 percent to roughly 34.5 percent. Marathns 3.1 percent share fell below the 4
percent threshold under the Justice Departments Guidelines for acquired firms in
industries with four firm concentration ratios below 75 percent, while Mobils 5.4-
percent share fell below the 10 percent threshold for acquiring firm market shares.
Thus, the merger fell within a safe harbor range under the Guidelines.
Market structure and changes in it are analyzed in merger cases because of economic
theory and evidence suggesting that the more concentrated a market is, the greater is
the likelihood of undetected, undeterred collusion or unaggressive live and let live
oligopoly pricing. The economist witnesses for Marathn and Mobil agreed that
concentration ratios like those in Table 1-1, if valid, lay on the low side of the point at
which oligopoly behavior emerges. Neither was willing to identify a precise numerical
point at which competitive structure ends and oligopoly begins. As the Mobil economist
testified:
I would be misrepresenting both my knowledge and the knowledge of the profession
if I said there is a critical point measured by one concentration measure or another
beyond which thou shalt not tread. But there is a relationship which, beyond a certain
point, causes most economists to worry about competitive behavior, and at a low level,
to consider such worries to be redundant and frivolous.
Absent other compelling considerations, the merger was unlikely to be found illegal if
the relevant domain of competition were a market of nation wide scope.
Mobil reinforced this conclusin by documenting the generally declining trend in both
four-firm and eight-firm concentration ratios between 1970 and 1980. Earlier Supreme
Coiirt precedents had placed special emphasis on preventing mergers in industries
with a rising concentration trend.6 Marathn, on the other hand, claimed that the
declining national concentration shown by Table 1-1 stemmed from extensive federal
government intervention in petroleum markets. Beginning in 1971, price Controls were
placed on petroleum producs, and in early 1974, the program was modified to inelude
a crude-oil allocation system. Entitle ments to Price controlled crude oil were given
out with a small refiner bias sufficiently lucrative to induce considerable investment
in refineries too small to be efficient and survive in a competitive market. In 1979,
President Crter announced a phaseout of the price Controls and entitle-ments
system, and in early 1981 the program ended. Marathn s economist testified that the
proliferation of small, independently owned refineries contributed to the observed
decline in national concentration ratios. With the elimination of the entitlements system
and other developments to be discussed later, he predicted, concentration was likely
to increase again in the future.
Marathns complaint urged that individual States could be viewed as relevant
geographic markets. If this contention (disputed by Mobil) were accepted, the
measured concentration ratios, shown in Table 1-2, were con-siderably higher than
those found at the national level. In at least three of the States served by both
Marathn and Mobil Illinois, Michigan, and Wisconsin the 1968 Department of
Justice Guidelines were exceeded.
Thus, knowing whether the relevant market was national or a series of smaller areas
was crucial to how one interpreted the mergers impact on market structure and henee
its possible behavioral effeets.
The Geographic Structure of Petroleum Distribution
Several approaches have been proposed and used by economists to determine
whether relevant markets are local, regional, national, or even International. There are
three main variants: assessing the potential for, and magnitude of, product flows
across the boundaries of narrowly defined ter- ritories; determining the probability that
sellers might raise prices at some point in geographic space, taking into account the
possibility that such attempts might be undermined if competitive producs could flow
in from other locations; and assessing the actual price outeomes of competition, or its
absence, across varying expanses of geographic space. There was sub- stantial
agreement between the economist witnesses for Marathn and Mobil on the criteria
to be applied. Although they incorporated facets of all three approaches, both
emphasized the analysis of actual price outeomes. Thus, according to Marathns
economist:
What happens if the price of gasoline in Cleveland is raised because of, say, some
breakdown of competition? Who might move into this gap to supply more product until
the price has been competed back down to the competitive level? What you would
look for in trying to encompass all the producers in the relevant geographic market is
the question, is there a tendeney for prices to become uniform? And if there is such a
tendeney one would say that we have a relevant geographic market or in the words of
Mobils economist:
We define the market as the geographic area within which the price tends to uniformity,
allowance being made for transportation costs. And I have to ask the question: How
does that tendeney of price to equality get achieved? Since, in general, demanders
are not going to move in response to the changing conditions you look for shipments
on the supply side.
Rich evidence was presented on the geographic patterns of petroleum refining and
marketing and on the opportunities for transporting petroleum producs from one part
of the United States to another. After closing a small refinery in Buffalo, New York,
Mobil had six domestic refineries, with locations and capacities (in barris of crude oil
input per day) as follows:
Marathn was a regional company with gasoline marketing operations limited to
twenty-one States and with special strength in the Midwest. Its four refineries were as
follows:
Unless the market were viewed as nationwide, Mobils refineries in California and
Washington could be excluded from consideration as competitors to Marathn.
Determining the competitive interrelationships of the remaining refineries was more
complex. The flow of refined petroleum producs in the United States depends upon
the location of crude oil supplies, the means used to transport them, the location of the
refineries, and the means used to transport refined producs. Crude oil reserves are
located preponderantly in the Texas Gulf area and Oklahoma, California, Alaska, and
the Rocky Mountains. Around those sources, a distinctive pattern of crude oil and
product movements has developed. It can be characterized in terms of Petroleum Al
location District, or PAD, groupings developed by the U.S. Department of the Interior.
PAD I consists of the East Coast States; PAD II, the Midwestern States (from Ohio to
North Dakota); PAD III, the Gulf Coast States (Texas, Louisiana, Mississippi, Alabama,
Arkansas, and New Mxico); PAD IV, the Mountain States; and PAD V, the West
Coast States (plus Nevada). Three of the five have substantial crude oil resources;
two do not.
Table 1-3 shows the pattern of product demand and supply flows in 1980. Gulf States
PAD III was largely self sufficient in meeting its own demands, but also exported
extensively to adjacent areas, especially PAD I. PAD II, which was Marathns
principal marketing area, was also fairly self-sufficient, but imported 14 percent of its
product needs from PAD III, and smaller quantities from PAD I and Caada. Western
PADs IV and V were also nearly self-sufficient. The eastern States, on the other hand,
did relatively little of their own refining, depending heavily upon imports from PAD III
and overseas.
How demand is satisfied depends also upon the cost and availability of transportation
media. Crude oil moves to refineries in oceangoing tankers, crude oil pipelines, and
(less frequently) river barges. Oil producs move from the refinery to market in tankers,
product pipelines, barges, rail cars, and tank trucks. There are massive and persistent
economies of scale in pipelining and tanker operations. (Tanker operations will not be
considered further, since they were infeasible in supplying the interior United States.)
The average cost of transporting a barrel of crude oil (or slightly less accurately,
petroleum producs) 1000 miles by pipelines of diverse design capacities in 1969 was
estimated by Pearl and Enos (1975, p. 61) as follows:
Plainly, supplies obtained through the largest pipelines (i.e., 48-inch-diameter pipes
with a 1.5-million-barrel daily capacity) were much more economical than those using
smaller lines.
In 1981, the lower 48 U.S. States were richly interconnected with product and, to a
lesser degree, crude-oil pipelines, as illustrated in Figures 1-1 and 1-2. However,
several features were of special relevance to the Marathon-Mobil market definition
dispute. For one, product and crude connections between western PADs IV and V and
States east of the Rocky Mountains were relatively sparse. Indeed, at the time of the
suit, there was no economical means of transporting either crude oil or product from
the Pacific States eastward. Second, PAD I was well connected with product pipelines
originating in PAD III, including the Colonial (shown in Figure 1-1 branching at
Greensboro, North Carolina), with a 40-inch diameter over much of its length, and the
half-million-barrel per day Plantation. It had no comparable crude oil connections.
Third and less evident in the figures, the upper Midwest was better connected with
crude-oil pipelines from the Gulf States than with product pipelines. The largest crude
oil pipeline (the Capline, which heads nearly due north from New Orleans in Figure 1-
2) had a capacity of 1.2 million barris per day, while the largest product pipeline from
the Gulf had a capacity of only 374,000 barris per day. This meant that it cost a half
cent more per galln in 1981 to ship product than to ship crude oil from the Gulf. This
difference helps explain the near self sufficiency of PAD II in refining producs for its
own consumption. More generally, much of the product flow pattern seen in Table 1-3
becomes explicable in terms of the pipeline interconnections shown by Figures 1-1
and 1-2.
Pipelines are not the only transportation mdium, but with the excep-tion of foreign-
flag tankers, they are the least expensive. The costs of transporting a barrel of
petroleum producs 1000 miles by various media in 1966 were estimated as follows:
Again, the superiority of pipelines over everything but tankers is evident.
Co.nsequently, petroleum producs in the United States are characteristically
transported by pipeline (or less freqently, barge) to terminis (marked T in Figure 1-
1) located near refineries or substantial metropolitan areas. The typical terminal
contains at least several storage tanks, and several companies often use a particular
companys terminal to store and distribute their producs. In 1981, Marathn operated
fifty terminis to serve the twenty-one States in which it marketed petroleum producs.
From such terminis, products are transponed to market (in the case of motor
gasoline, to Service stations or bulk storage depots) in tank trucks. The cost of
transporting gasoline 45 miles by tank truck in 1981 was estimated by witnesses as
ranging from 0.7 cents to 2.5 cents per galln, depending upon road conditions and
the size of the truck.
Terminis are a key pricing node in the petroleum distribution system. Companies set
terminal rack prices varying from terminal to terminal. Surcharges applied to the
terminal rack prices determine the effective prices at which the various marketing
channels in ascending order of price paid, jobbers, distributors, and dealers obtain
their supplies. Rack prices effective October 27, 1981, for regular gasoline in
Marathns Southern regin ranged from $0.990 per galln at the Gary ville, Louisiana,
refin- ery terminal to $1.019 in Taft, Florida. In the northern regin, prices ranged from
$1.003 in Chicago to $1.060 at the Chillicothe, Illinois, terminal (near Peoria).
According to Marathns manager of Wholesale marketing, the factors affecting price
levels at the diverse terminis included refining cost, transportation cost, and the
competition that we have in the gasoline market.
Intercity Price Relationships
Gasoline moves from terminis to individual cities, where the prices consumers pay
are set by retailers, most (but not all) of which are independently owned businesses
that is, without ownership ties to the refiners. However, the refiners in turn adjust their
terminal prices to reflect competitive conditions in their customers urban markets.
Marathons economist showed that prices in 1981 varied widely from city to city, often
in directions inconsistent with transportation cost differences. Mobil responded by
offering in evidence nine charts such as Figures 1-3 and 1-4, plotting the trends of
unleaded regular gasoline Wholesale prices between city pairs over the two years from
October 1979 through September 1981.16
By any criterion, the movements were highly correlated between cities. Much of the
trend element common to the price series stemmed from a common cause.
Throughout much of the period covered, crude oil costs were rising rapidly as a result
of Iranian revolution induced supply disruptions, the reaction of the Organization of
Petroleum Exporting Countries (OPEC) to them, and the phaseout of U.S. crude oil
price cojfttrols. The sharp increase in prices triggered demand cutbacks that, when
decontrol ended, Ieft refiners with substantial excess capacity and that in turn led to
price competition and falling Wholesale prices.
Of greater evidentiary interest were the deviations from trend between the city pairs.
For several months running, Detroit prices were above Chicago prices by as much as
four cents, reversing the pattern in subsequent periods. More curiously, New Orleans
prices were virtually identical to Chicago prices in many months, despite the cise
proximity of New Orleans to crude oil deposits and henee its lower transport costs. In
other periods, a differential in the expected direction materialized.
Mobils economist viewed these deviations from price uniformity, net of transportation
costs, as short-lived and unstable:
On a week-to-week basis, they have substantial autonomy
On the other hand, let me make [the time units] years, and Im going to get a much
closer congruence. I dont really have any concern over whether this month has a set
of alternative markets that is narrow or wide to anywhere near the degree I have a
concern over next year or the year after. There is nothing anyone can do the most
sovereign of our federal power cant change the world in a week or two.
Marathns economist argued that price patterns of the previous sev- eral years, and
indeed, over the decade following the imposition of price Controls in 1971, were so
severely distorted by government intervention that they had little relevance to
predicting gasoline pricing behavior once the transition to a free market was
completed. For evidence on free market behavioral tendencies, he said, one had to
go back to the period before 1971. In support, the Marathn economist cited two
studies from that period.
Learned and Ellsworth (1959) of the Harvard Business School pub- lished an
extremely detailed analysis of gasoline pricing behavior over the period 1948-1957.
The research had special relevance to the Marathon- Mobil case because it focused
on Ohio, in which Marathn had then, and subsequently retained, a particularly strong
position. The authors found important differences in pricing between such metropolitan
areas as Akron and Toledo, depending upon the intensity of competition, and even
within subsections of a metropolitan area. A ten-year comparison of Wholesale prices
in Ohio, Chicago, and northern Oklahoma showed differentials vary- ing by from three-
tenths of a cent to two cents that lasted for as long as two years and that cannot be
explained on the basis of transportation costs.18
The other study, by Howard Marvel (1978), analyzed movements in retail gasoline
prices across twenty-two cities over the period 1964-1971. Nationwide price
leadership by Texaco in 1965 successfully raised gasoline prices following a period of
intense price competition. The question posed by author Marvel was, How long did it
take gasoline prices to return to competitive levels in the various cities, and upon what
did the speed of adjustment depend? He computed regression equations in which the
aver- age price in some city and time period was the dependent variable, with
independent variables including city population, transportation costs, State and local
tax levels, and a Herfindahl-Hirschman Index of seller concentra- tion in the various
cities. Marvel found (1978, p. 258) that it took roughly five years before competition
had become so widespread in some of the markets... that its effect on prices could no
longer be confined to the lower tail of the offer price distribution. Prices eroded first
among the lower-price (i.e., unbranded) sellers, and even more importantly, competi-
tions impact was felt first in the low concentration markets, spreading more slowly in
the more highly concentrated markets. Thus, the adjustment to supracompetitive price
increases required several years, not merely a few months, and it was systematically
related to differences in seller structure between cities. Marathons economist
emphasized these results in conclud- ing that competitive conditions varied sufficiently
from city to city for individual cities to be reasonably viewed as seprate, meaningful
markets.19
With individual metropolitan areas taken as a reasonable approxi- matin to economic
markets, the proposed merger had more dramatic structural implications. Data were
presented on the 1981 market shares of Marathn and Mobil in thirty-six Standard
Metropolitan Statistical Areas.20 Selected examples inelude the following:
Among the thirty-six cities for which data were available, the Department of Justice
Merger Guidelines market share thresholds were overstepped in twenty-four cities.21
The Decisin
Weighing the conflicting interpretations of the evidence, the District Court concluded
on November 30, 1981, that
The persistence of price differentials in various areas of the nation demonstrates that
motor gasoline does not move from area to area in response to price changes easily
or as readily as Mobil asserts. Rather, they indcate that the relevant geographic
market for motor gasoline is something less than nationwide. Clearly, such an analy-
sis must be more fully developed at a trial on the merits.22
The court went on to rule that, for purposes of the preliminary injunction determination,
individual midwestern States were relevant markets. This compromise definition had
been emphasized by neither partys economist, but it could be quantied by using the
most complete concentration and market share data. The court decided further that
the combined market shares of Mobil and Marathn in six States approached or
exceeded the thresholds found illegal in previous merger cases. In finding that markets
were less than nationwide, the court recognized that the price differentials persisting
between cities were only one or two cents per galln. This was a small amount in
relation to the price of gasoline (well over a dollar per galln) at the time. However,
testimony had shown that Marathons profitsin a good year were four cents per
galln.23 From this, the court concluded", the magnitude of the intercity price
differentials is significant when compared to a petroleum companys profits. 24
Marathons Role as Supplier to Independent Retailers
Marathn argued that the contemplated acquisition by Mobil had competitive
significance beyond the changes reflected in raw market concentration ratios. In
addition, Marathons role as a principal supplier of gasoline to independent gasoline
marketers could be jeopardized.
Although it is difficult to draw a fine line, it has been customary to distinguish between
major brand gasoline and gasoline offered by independent marketers. The major
brands are offered by large (usually nationwide) refiners, receive considerable
advertising support, and are often backed by credit card Services. The independents
traditionally avoided advertising and credit card Services, stressing lower prices and
their ability to oprate at high perstation volumes. Before the sharp rise in gasoline
prices precipitated by OPEC beginning in 1973, the independent marketers
customarily sold gasoline of comparable quality two cents per galln below the major
brand price. In the late 1970s and early 1980s, a price differential of three to five cents
per galln was typical. The independent marketers, providing roughly 20 percent of all
American gasoline at retail, injected competition by offering an alternative that was
attractive to price-conscious consumers, and were also the industrys mavericks,
originating many if not most of the industrys localized retail price wars. Price wars
were typically provoked when a widening of the major independent price differential
drew away more sales volume than the majors were willing to concede.
Of the 6.55 million gallons of motor gasoline sold by Marathn in 1980, approximately
15 percent went to dealers (mostly independently owned) who sold under the
Marathn brand, predominantly in the Midwest, and the remainder moved into the
market as unbranded gasoline. Thirty five percent of Marathons sales were through
wholly or partially owned Marathn subsidiarles selling under such low price logos as
Gastown, Speedway, Bonded, and Consolidated, and half were to some 1100
businesses satisfying fully the appellation independent marketers. Marathons
independent customers had retail outlets in a total of twenty one States, all in
Petroleum Allocation Districts (PADs) I, II, and III, and all but two east of the Mississippi
River. Marathons gasoline sales to independent marketers were estimated to be
approximately 10 percent of the total supply to such marketers in PADs II and III.
Being a reliable source of supply to the independents was an important facet of
Marathons business strategy. The price and quantity Controls applied to petroleum
producs by the federal government during the 1970s.
Had on occasion led to severe shortages. Marathns policy under those conditions
was to treat its independent customers exactly as it treated its own branded outlets.
From 1974 to 1976, when gasoline supplies were often only 80 to 85 percent of
quantities demanded at the controlled prices, Marathns branded and unbranded
customers received equal percentage allocations. In 1979, when shortages were
precipitated by the Iranian revo- lution, Marathn maintained a 100 percent allocation
rate by buying addi- tional gasoline in the spot market at twelve to thirty-seven cents
per galln above the Wholesale price at which it sold to its marketer-customers.
Mobil, like other members of the petroleum industry Big Eight, pursued a quite different
policy. A Federal Trade Commission (FTC) investigaron (U.S. Senate 1973, p. 8)
revealed that from 1967 through 1971, independent marketers purchased only 1.1
percent of their gasoline requirements directly from Big Eight members. Several Big
Eight represen- tatives stated to the FTC that they would not sell to independents,
regard- less of price. Two independent marketer executives called by Marathn as
witnesses testified that they had sought to buy from Mobil, but were rebuffed on
asserted Mobil company policy grounds. The president of the Independent Gasoline
Marketers Council also testified that Mobil did not sell directly to independents,
although in times of excess supply (as 1981 was), major companies gasoline found
its way into independents tanks through jobbers and other intermediarles. A 1981
internal Mobil staff study found that the pricedepressing effects of a full Mobil shift from
branded to unbranded marketing would more than outweigh the cost savings. As a
result, the study concluded, abandonment of our historie branded marketing mode
was not warranted.
Mobils president testified that although he knew of no formal company policy
preventing sales to independent marketers, Mobil in fact provided very little gasoline
to the independents. He added, however:
When we first looked at Marathn and discovered they sold a lot of gasoline outside
of normal branded outlets like Mobil does, we understood we would have to continu
to supply... What Im trying to say is, Mobil now has a policy, if we acquire Marathn,
we will supply those same types of people that Marathn is supplying, and I dont know
why we should have to define it further.
Mobils economist testified that even if Mobil did not continu supplying independents,
contrary to its promise, if there is a commercially successful demand for the product
[someone] will cater to it and provide gasoline at prices that are marketable. So it is
my belief that the supplies would be fortheoming as long as the demand is there.
Marathn witnesses agreed that under the market conditions prevailing during 1981,
independent marketers would have no difficulty obtaining gasoline supplies, whether
or not Mobil chose to be their supplier. Gasoline prices had soared with U.S. price
decontrol and the increase in OFECs crude oil prices from $15 per barrel in 1978 to
$34 in 1981. Quantities demanded fell, and as a consequence, U.S. petroleum
refineries utilized only 66 percent of their effective capacity in October 1981 far below
the 90-95 percent rate at which they preferred to oprate. The burden of excess
capacity triggered price warfare, leading a Mobil witness to characterize the
competitive conditions that exist today as the most ruthless and tough and difficult that
I have ever seen. In sharp contrast to the situation in 1979, crude oil was also in
abundant supply, and so Price competitive refined producs were available to majors
and independents alike.
The key question was, What would the future hold? Twice during the 1970s, gasoline
supplies had been extremely tight, and partly because of perverse incentives built into
the original government price Controls, major petroleum companies with scarce or low
priced crude oil tended to favor their own retail outlets over those of rivals. Possessing
the Yates Field and other domestic crude oil reserves, Marathn was a particularly
reliable gasoline supplier to the independents. If crises occurred in the future, would
Mobil be as reliable as Marathn, and would it sell to independents at equally favorable
prices? And would crises recur? With OPEC setting its prices so high, the immediate
prognosis was glut, not scarcity, in world oil markets. But war could curtail supplies,
as it had, briefly, in 1973 and 1979, and fighting had already erupted between two
important OPEC members, Irn and Iraq. In addition, sooner or later, demand would
catch up to supply again, leaving tight crude oil markets. The refining industry was also
under- going structural change. Federal price Controls and crude oil allocations had
encouraged the construction of small-scale, so called teakettle refineries whose
economic viability in a period of uncontrolled competition was dubious. Marathns
economist witness estimated that small scale refineries accounted for approximately
10 percent of U.S. refining capacity. He predicted that at least half of that capacity was
likely to exit the industry in the future. If in addition Mobil Marathon ceased supplying
independent mar- keters, the independents would lose a third of the capacity they
currently tapped. A future supply squeeze on the independents could not be ruled out
under pessimistic but not improbable assumptions.
Bandwagon Effects
A third allegation by Marathn Oil was that if its acquisition by Mobil were permitted, a
bandwagon effect would be triggered. Additional oil company acquisitions would
ensue, each citing the Mobil Marathon case as a favorable precedent. Conoco, the
nations sixteenth largest refiner, had barely slipped through Mobils fingers earlier in
1981. The financial pages carried reports that other oil giants had arranged lines of
credit with which they, too, could make acquisitions: Texaco had $5.5 billion, Gulf Oil
$5 billion, Pennzoil $2.5 billion, and Cities Service $1 billion. In passing the Celler
Kefauver Act, Congress in 1950 had expressed clearly its intent to intervene against
a series of acquisitions whose cumulative effect raay be a significant reduction in
the vigor of competition. This, Marathn argued, was exactly what was occurring in
the petroleum industry.
The Outcome
Addressing only the question of whether the combined gasoline market shares in six
midwestern States exceeded those found to breach the limits of tolerance defined in
previous merger cases, the Federal District Court in Cleveland enjoined Mobil from
carrying out its plan to acquire Marathn. A day later, on December 1, Mobil
announced to the court that it was will- ing to sell off all of Marathns refining and
marketing operations in the six offending States. It asked therefore that, since the basis
of the antitrust violation would be eliminated, the injunction be removed. The court
refused. Under severe time pressure because of its pending tender offer, Mobil
appealed. On December 23, the Circuit Court of Appeals ruled against Mobil. It found
that the District Court did not err in analyzing concentration ratios in defining relevant
markets by State rather than limit- ing its consideration to the nation as a whole. In
addition, it opined:
Mobil Corporation did not convince the District Court that the merger would benefit the
economy, increase operating efficiency, bring advantages of scale, or substitute better
management. Mobils reasons for the acquisition seem to be that Marathn stock was
underpriced in the market and that Marathn s valuable Yates Field in Texas would
provide Mobil with additional needed domestic crude oil reserves. We do not see that
it is of particular benefit to the national economy to substitute Mobil ownership of the
Yates Field for Marathn ownership, and it may be disadvantageous. It may reduce
Mobils incentives to explore and find its own new domestic reserves.
It went on to note that any conceivable benefits are more than offset by the potential
elimination of Marathn as a supplier of price conscious independents. Mobil s
appeal to the Supreme Court for an emergency stay was similarly unsuccessful.
Meanwhile, there were important developments on two other fronts. While the
Marathon-Mobil preliminary injunction hearing was underway, other Mobil attorneys
were presenting information to, and negotiating with, the FTC, which was responsible
for the federal governments antitrust enforcement with respect to the merger. Mobils
offer to divest domestic refining and marketing operations fell upon more receptive
ears in Washington than in Cleveland. On December 1, Mobil announced that it had
reached an agreement in principie to sell all of Marathns American refining,
transportation, and marketing assets to the Amerada Hess Corporation. Amerada had
refineries in Port Reading, New Jersey; Purvis, Mississippi; and St. Croix, Virgin
Islands. It had no marketing operations in the midwestern States singled out in the
District Courts opinin. The announced price, for assets with an accounting book
valu of $1.4 billion, was $400 million. Mobil was willing to accept a low price because
intense competition had rendered refining and marketing operations unprofitable and
because its main objective in offering $5.1 billion for Marathn shares was to acquire
Marathns rich oil reserves.
An assumption implicit in the FTCs acceptance of this plan was that the integration of
Marathns oil reserves with downstream product refining and marketing operations
was unimportant. Amerada s domestic oil production in 1980 was 80,000 barris per
day, much less than Marathns and far too little to supply its refineries, with a total
capacity of 730,000 barris per day. Thus, if another crude oil supply crisis
materialized, it was implicitly assumed that Amerada Hess would somehow secure the
petroleum necessary to keep its Marathn refineries competitive. On December 3, the
FTC filed a preliminary injunction plea charging that the intended Mobil Marathon
merger would reduce competition in numerous midwestern metropolitan areas and
reduce supplies to independent marketers. But this was a formality, for the FTC
simultaneously announced its intention not to prosecute its complaint until it reached
a final decisin on the adequacy of Mobil s divestiture plan.
Marathns management officials were also busy. They did not want to be acquired by
Mobil, but once their company was put in play at a substantial stock price premium
above previous levels, it would be difficult to avoid being taken over. They therefore
sought white knights to come to the rescue. Gulf Oil secretly offered to pay $120 per
share, but only on the condi- tion that Marathns antitrust challenge to Mobil failed
something Marathns management deemed unlikely.40 On November 19, as
testimony in the Cleveland antitrust hearing neared completion, the U.S. Steel
Corporation emerged as the favored white knight. It offered Marathn stockholders a
package of cash and debentures valued at $106 per share $21 more per share than
Mobils original proposal. On November 25, Mobil retaliated by raising its offer to $108
per share in a package similar to, but slightly more attractive than, U.S. Steels tender.
Mobil, however, was held back by two constraints. The first and eventually fatal
limitation was its inability to break free from the Cleveland District Courts preliminary
injunction. Also, the agreement reached between U.S. Steel and Marathn
management gave U.S. Steel a binding option to purchase Marathons Yates Field
interest for $2.8 billion if U.S. Steels full offer did not succeed and if a third party (e.g.,
Mobil) gained control of Marathn. Without its crown jewel, Marathn was much less
interesting to Mobil, and so Mobil attempted to have the option declared illegal through
a suit filed at the Federal District Court in Cincinnati. Mobil eventually won the battle,
but by the time the appellate court ruled against the option, the war was lost, since
U.S. Steel was already far along in its bid to acquire all of Marathn without invoking
the Yates option. Moreover, since Mobil remained blocked by the antitrust injunction,
the option issue became moot. In a last ditch effort, Mobil began purchasing shares of
U.S. Steel and threatened to acquire a 25 percent interest, leaving the longer run
implications uncertain. It abandoned the gambit in early 1982.
Thus, Marathn Oil became a largely autonomous unit within the U.S. Steel
Corporation. Reflecting the fundamental change in business orienta- tion the merger
effected, U.S. Steel changed its ame in 1986 to USX Corporation.
In hindsight, there are reasons to doubt whether the acquisition was wise from the
standpoint of the former Steel companys shareholders. For one, the acquisition cost
USX a considerable amount of ill will on Capitol Hill, where Steel industry
representatives had successfully pleaded for protection against imports with an
argument that the increased revenues would be invested in modernization rather than
diversification. In addition, depressed conditions in the Steel industry had led to heavy
losses on Steel operations that, USX hoped, could offset the Marathn divisins
federal income tax liabilities a potential advantage for USX at the cost of the U.S.
Treasury. The $35 per barrel crude oil prices that made Yates Field and related
Marathn properties such an attractive target, however, fell dramatically as OPEC
nations, saddled with enormous excess capacity, chiseled on their cartel agreements.
In June 1986, with the cartel in disarray, prices FOB Saudi Arabia dropped as low as
$8 per barrel. From 1987 to 1991, Persian Gulf prices averaged $15 (excluding a brief
run-up when Iraq invaded Kuwait). These factors, plus alleged weak management, led
to a decline in USX stock prices, triggering a series of takeover attempts and proxy
battles that induced USX to divide itself in May 1991 into Steel and energy groups,
each with its own common stock.42 In the first year following the spin-off, the average
market valu of USX-Marathon common shares was $7.3 billion a gain relative to the
original acquisition outlay of $6.4 billion, but a loss when subsequent petroleum
investments are taken into account. Meanwhile, between 1981 and 1991, the Standard
& Poors 500 stock price ndex trebled.
The tight crude oil market conditions that might have squeezed inde- pendent
petroleum refiners and marketers did not materialize in the decade following the Mobil-
Marathon trial. The Cleveland District Courts decisin against Mobil also did not put
an end to major petroleum industry mergers. Mobil subsequently acquired crude-rich
Superior Oil for $5.7 billion. U.S. Steel added to its holdings by acquiring crude-rich
Texas. Oil & Gas Company. Texaco acquired Getty Oil after agreeing to divest some
Getty marketing operations; Gulf Oil was acquired by Standard Oil of California; Cities
Service was acquired by Occidental Petroleum; and British Petroleum converted its
partial interest in Standard Oil of Ohio to a full ownership position. Phillips Petroleum
and Unocal narrowly escaped takeover attempts. Numerous smaller acquisitions also
occurred. Merger activity slowed only when the intense bidding drove oil company
stock prices to levels that, combined with the collapse of crude oil prices in 1986, made
the remaining petroleum producers less attractive takeover targets.