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The Wall Street Journal: BP Prepares to Move Beyond Browne

Before Passing the Reins,
Chief Needs to Tighten Grip
To Restore Stock’s Premium
September 2, 2006; Page B14

Lord Browne of Madingley is near the end of his time at the helm of BP PLC. During the past 11 years, he has certainly turned the former British government-owned oil company into a giant. Along the way, Lord Browne’s reputation has grown with BP’s girth. Shareholders, however, haven’t correspondingly benefited from BP’s global shopping spree.

Regulatory investigations into possible market manipulation in the U.S. and accidents in Alaska and Texas have thrown the issue into sharp relief and reduced the premium traditionally accorded to BP’s shares. BP says it is aware of the regulatory inquiries and “cooperating fully” with U.S. authorities.

These issues have also put the company in the crosshairs of American legislators. The politicians are already worried about popular anger over rising gasoline prices at a time of record profits for Big Oil, and will grill senior BP executives, led by the president of its U.S. arm, about pipeline leaks in the coming week on Capitol Hill.

Other major oil firms haven’t suffered similar problems in the U.S. So BP’s gaffes have raised questions about whether the wheels are suddenly falling off Lord Browne’s hitherto highly regarded acquisition machine.

When Lord Browne took the reins in 1995, BP’s main assets were tired fields in the North Sea and Alaska. Its market capitalization was £25 billion, or about $40 billion at that time, half the size of Exxon or Royal Dutch Shell. Lord Browne went hunting to close the gap. First he led the $56 billion takeover of Amoco. Then he bought Arco for $27 billion. Then he led BP into some of the world’s trickiest oil provinces. The firm’s $7 billion purchase of half of TNK in 2003 remains Russia’s largest single foreign investment to date.

This deal-making more than quadrupled BP’s market value. Since 1995, Lord Browne spent more than $131 billion on acquisitions, according to Dealogic data. That is five times as much as Shell spent, and nearly half as much more as Exxon or France’s Total shelled out. Yet the return that BP earned off these deals isn’t so distinctive.

Lord Browne’s insight was that scale would allow BP to achieve superior returns. But these returns don’t seem to have materialized. During his tenure, investors have enjoyed a total return, including reinvested dividends, of 312%, according to Thomson Financial. That beats the broader UK market hands down. However it is no better than BP’s European oil peers, many of which are smaller.

The reason for this may be becoming apparent. While Lord Browne’s deal-making increased BP’s size, it also increased its complexity. And that additional complexity, and the bureaucracy needed to deal with it, may have offset the benefits of scale. Take BP’s problems in Alaska and more recent probes into its trading activities in the U.S. These problems may point to inadequate oversight or inappropriate incentives. Lord Browne declined to comment.

Giant companies built on deals often face these questions. Think of Citigroup Inc. or Vodafone Group PLC, another U.K. company that achieved global scale in a few years by snapping up international rivals. The mobile-phone giant failed to extract the hoped-for benefits from its acquisitions. Citigroup’s problems aren’t dissimilar. Both companies face pressure from some shareholders to break up.

Lord Browne’s acquisition career is probably over. But he still has 16 months to address BP’s management problems. This is a much greater task. The prize, however, should be the return of BP’s premium rating. That would be a worthy legacy to leave behind.

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