Was Arco beyond saving?

Arco could have been a contender A decade ago, Atlantic Richfield Co. was considered among the most aggressive, innovative energy players in the world.

It fiercely battled British Petroleum in 1988 for control of Britoil - and ultimately lost - but then it turned right around and used the profits from Britoil stock to launch another takeover of a similar company, this time succeeding.

Arco's aggressive performance and strong earnings in the late '80s prompted Forbes magazine to write: "By several key indicators, Arco may well be the best-run major oil company in the U.S. today."

"We were going to own the world," said George Babikian, retired president of Arco Products Co. and mastermind of the company's highly successful low-price marketing strategy. "How things have changed."

Indeed. Having agreed this month to be acquired by BP Amoco PLC, Arco is expected by year end to become the latest L.A.-based company to fade into extinction.

So how did once-voracious Arco end up as the prey?

There is no single factor, but rather a series of decisions and events that span three decades. They include an ill-fated diversification into mining, an over-reliance on Alaskan production, complacency about developing oil and gas resources overseas, overly generous dividend payouts, and a big investment in Russia that went sour.

There was also the plunge in world oil prices.

Faced with a consolidating industry dominated by global giants, Arco Chairman Mike Bowlin felt compelled last year to study three distinct options: remain independent, buy another oil company, or seek a larger acquirer.

"The result was clear," Bowlin said in an interview late last week. "If the deal was good, the best option for shareholders and employees was to join BP."

The loss of Arco, yet another in a line of major L.A.-based corporations taken over by out-of-towners, is especially striking because the company was, in many ways, a model corporate citizen. It contributed untold millions to local charitable and cultural causes. Its executives, managers and administrative staff members were constantly exhorted to volunteer - and they did. Its name and distinctive red diamond logo were ubiquitous on the L.A. scene, most notably atop Arco Plaza, the tallest building in Southern California when it was built in 1971.

Arco became the West's No. 1 gasoline retailer in 1984, as drivers flocked to its low-price stations and bought snacks at its AM/PM mini-markets. Arco's visionary chairman, Robert O. Anderson, was intent on building an L.A.-based global empire.

But now that is gone, or going away. The company already has vacated Arco Plaza, throwing 250,000 square feet onto the already-soft downtown office market. Hundreds of Arco's 3.000 L.A.-area employees are expected to lose their jobs. The Arco name itself is likely to disappear under the cloak of London-based BP, which is in the process of dismantling its other U.S. acquisition, Chicago-based Amoco.

Could this scenario have been avoided? Arco officials, both past and present, say yes. So do many industry analysts.

"Not only could Arco have survived, it could have prospered," said Bowlin himself.

So why didn't it?

Former Chairman Lodwrick Cook said a key turning point goes back more than 20 years ago, when the company diversified into mining with its 1977 acquisition of Anaconda Co., a large copper and aluminum manufacturer. It was a move made during Anderson's empire-building days, when many major corporations were assembling widely diversified conglomerates.

"I do fault management for Anaconda," said Cook, now co-chairman of Global Crossing, a fast-growing telecommunications company. "In hindsight, the diversification into mining was a mistake. Management at the time felt there was synergy, but there wasn't. Plus, there were environmental problems. If we had diversified into oil and gas instead, we may have been a stronger company. If I had to pick a moment in time when the company got off track, it was then ."

The legacy of Anaconda lives on. Last year, Arco agreed to pay the state of Montana $215 million to clean up mining sites that were part of the Anaconda deal.

Ironically, Arco's misguided venture began just as the company was celebrating its greatest triumph, the opening of the Trans Alaska Pipeline in 1977.

While its Alaskan operations long have been held up as Arco's crown jewel. supporting the company through the '70s and '80s, they also contributed to Arco's weakness in the '90s, analysts said.

Excess optimism about oil reserves at Prudhoe Bay in Alaska made management somewhat complacent about developing oil and gas resources elsewhere, particularly overseas. Today, around 80 percent of Arco's production and 72 percent of its reserves are in the United States, making the company far more dependent of domestic sources than most of its competitors.

That's a problem, analysts said, because the United States is among the most expensive regions to drill for oil. Furthermore, pumping oil through the 800-mile-long Trans Alaska Pipeline can add as much as $4 to the cost of producing a barrel of crude. Meanwhile, reserves at Prudhoe Bay have been declining since the early '90s, forcing Arco to spend more money on exploration and development in the area.

"I think that big asset in Alaska constrained them," said John Parry, an analyst at securities firm John S. Herald Inc. "They diverted a lot of resources up there - money that could have been used elsewhere. So they didn't make the right kind of moves early enough. They didn't go overseas early enough. They didn't get into gas early enough."

Cook agreed.

"Both Mike Bowlin and I would say, if we had moved more successfully overseas sooner, we would have had a stronger base," he said. "It was combination of starting late and the difficulty of successfully finding oil."

When Arco finally made its move, string in the late '80s and reaching a peak in 1998, it was too late and too unfocused.

"Three or four times they decided to make a big push oversee," said Albert Anton at Carl H. Pforzheimer & Co. in New York. "The first few efforts were unsuccessful, and they spent a lot of money without results."

The company's recent acquisitions in lower-cost regions were ill-timed.

Because of Russia's depressed economy and stock market. Arco may be forced to write down much of the $340 million investment it made two years ago in Russian oil giant Lukoil. And a $3 billion Venezuelan refinery project is on hold indefinitely because Arco's partner has been unable to meet its financial obligations due to the collapse in oil prices.

Another poorly timed deal was last year's $2.5 billion acquisition of Union Texas Petroleum Holding Inc. With operations in many of the same overseas regions as Arco, Union Texas was seen as a quick way to boost the company's international muscle. But the deal was made when oil was at about $20 a barrel, prompting analysts to conclude that Arco overpaid.

"Union Texas turned out to be an ill-timed deal," said James Van Alen, an analyst at Janney Montgomery Scott Inc. in New York.

Even Arco's recent overseas triumph - a natural gas bonanza in Indonesia, the third-biggest hydrocarbon discovery in company history - has been muted by the Asian economic crisis. As a result, those reserves will not come on line until at least 2003.

Besides lagging overseas exploration efforts, another consequence of Arco's reliance on Alaska was excessive generosity with shareholders.

Flush with cash and confidence in 1991, the company increased its annual dividend to $5.50 per share. Analysts said that with today's lower oil prices, Arco could not sustain such a generous payout. Expectations that the dividend would be cut contributed to the share price remaining depressed, some analysts say, in turn putting pressure on Bowlin to sell.

Bowlin disagreed with that assessment, noting that if the company had remained independent he fully intended to defend the dividend. That point is now moot.

In raising the specter of "what might have been," analysts and others in the industry point to perhaps the biggest source of debate: Whether management was aggressive enough. especially after Anderson retired in 1986.

They note that both Bowlin and Cook came from conservative human resources backgrounds - unlike Anderson, who was an oil wildcatter. "Under Anderson the company had some visionary leadership," said Parry.

It was Anderson who, just a year after being named chairman of Atlantic Petroleum Storage Co., orchestrated the 1966 acquisition of Richfield Oil Corp., which created Arco. Under his leadership, the company bought Sinclair Oil Corp., moved its headquarters to Los Angeles and initiated the discount marketing policy that made Arco the biggest gasoline retailer on the West Coast.

While Anderson's expansionary moves were not all brilliant - he was the one who green-lighted the Anaconda deal, and other '70s-era diversification - the man did believe in size. And in today's oil market, where bigger is better, such leadership may have kept Arco independent. With oil prices remaining depressed and the cost of finding and tapping oil around the world remaining high, it is only the largest companies that have enough resources to survive.

That was certainly the conclusion Bowlin reached before he contacted BP to arrange the sellout.

"Arco could have survived as an independent." he said. "But my assessment was that a combination with BP would make a stronger entity - one of the greatest oil companies in the world."

Arco History

* 1866 - Atlantic Petroleum Storage Co. rounded in Philadelphia

* 1905 - Richfield Oil Corp. founded in Los Angeles

* 1917 - Richfield opens its first service station at Slauson and Central avenues in South Central L.A.

* 1929 - Richfield builds landmark 12-story office tower at Sixth and Flower streets in downtown L.A.

* 1931 - Richfield slides into receivership 

* 1936 - Richfield undergoes financial reorganization

* 1963 -Atlantic Petroleum acquires Hondo Oil & Gas Co. from Robert O. Anderson

* 1965 - Anderson elected chairman of Atlantic Petroleum

* 1966 - Atlantic merges with Richfield, forming Atlantic Richfield Co.

* 1968 - Arco and partner Exxon strike oil on the North Slope of Alaska, the biggest strike ever in the Western Hemisphere 

* 1969 - Arco acquires Sinclair Oil Corp.

* 1972 - Headquarters moves from New York to Arco Plaza in downtown L.A.

* 1977 - First tanker load of North Slope crude delivered to refinery

* 1979 - Arco introduces AM/PM minimarts

* 1982- Credit card sales end

* 1984 - Arco becomes leading gasoline marketer in the West

* 1985 - $3.2 billion in assets sold in massive restructuring

* 1986 - Robert O. Anderson retires, Lodwrick M. Cook becomes chairman/chief executive

* 1987 - Arco Chemical spun off through initial public offering

* 1989 - Nation's first environmentally engineered gasoline, EC-1, introduced; Lyondell Petrochemical spun off through IPO 

* 1991 - Lower 48 operations restructured, 1,300 jobs eliminated

* 1994 - Mike R. Bowlin promoted to chief executive

* 1995 - Lodwrick Cook retires, Bowlin adds chairman title

* 1996 - Arco starts up China's largest offshore natural-gas field, signs major production deal in Algeria

* 1997 - Joint venture entered into with Lukoil, Russia's largest oil company

* 1988 - Arco announces it will lay off 900 workers and moves its headquarters out of Arco Plaza and into a nearby downtown L.A. tower

* 1999 - BP Amoco agrees to buy Arco for about $25.7 billion

RELATED ARTICLE: For Arco Employees, Bitterness and Anger

By JASON BOOTH Staff Reporter

Messages posted by Atlantic Richfield Co. employees in an Internet chat room said it all.

In the days following word that Arco was being acquired by BP Amoco, resulting in at least 2,000 layoffs, opinions ranged from bemusement to bitterness.

"Good Grief, is this the Brits' way of getting back at us for dumping lousy tea into Boston Harbor? Talk about revenge!" said one message.

Another 34-year employee accused Arco leadership of corporate treason.

"CEOs and boards of directors arc supposed to lead and use their efforts to promote the well being of employees as well as shareholders," he wrote. "Or is this an old-fashioned concept replaced by the greed of top executives?"

In an age when major acquisitions have become commonplace, few workers expect to be employed at the same company for more than a few years. But Arco was different. All but two members of its executive committee were hired out of college, and it was not unusual for middle managers to have 30 years of uninterrupted service.

"Arco was one of those great places to work," said a recently departed Arco employee, who asked to remain anonymous because his severance package was still being negotiated. "It is sad to see it go. That's a hundred years of history going."

Even Arco CEO Mike Bowlin acknowledged that the deal has soured a lot of Arco workers. "I'm sure over the next few months they will go through some grieving, some anger," he said.

A particular sore point is that Bowlin continued to talk publicly about keeping the company independent, even as he was seeking a buyout from BP Amoco.

Bowlin makes no excuses. In fact, he says he never deceived anyone.

"Every time I have talked to employees, I have said that Arco can remain independent," he said. "But I've also said that I'll do what's best for shareholders." (That includes Bowlin. Under the terms of the deal, he reportedly will walk away with up to $34 million.)

USC business ethics professor Nancy Kurlind maintains that if layoffs and changes in corporate culture are executed poorly, it could disrupt operations at the combined company, in turn hurting stock performance. Already, tensions are running high at Amoco's former headquarters in Chicago, amid allegations that BP is taking a heavy-handed approach to merging the two firms.

If there is any consolation for soon-to-be-jobless Arco employees, it's that they are entering a strong job market. Most of the employees at the L.A. headquarters have skills in areas like accounting, marketing, human resources and legal affairs that could be transferred to other companies or industries. And with severance packages of at least six months' pay, laid-off employees will have plenty of time to look for new jobs.

RELATED ARTICLE: Will BP Keep Arco's Low-Price Policy?

By EDVARD PETTERSSON Staff Reporter

Atlantic Richfield Co. used a simple marketing strategy to become the dominant gasoline retailer in the Western United States: It charged less than the competition.

BP Amoco, which is taking over the L.A.-based oil company, uses a full-service, premium-price approach.

One of these strategies will survive after the merger of the two companies. But which one?

At a press conference last week, Doug Ford, BP Amoco's executive in charge of downstream operations, said it was too early to tell what will happen with Arco's retail operations. And Arco spokesman Paul Langland said, "It could be up to at least a year before any decisions will be made."

But various industry observers are already predicting everything from no change, to gradual change, to radical change.

"There is no question that the Arco name will not be used and that BP Amoco will abandon the low-price, no-frills strategy," said Ben Brockwell, editor of Oil Price Information Service, an industry trade publication. "And this will happen quicker than you think. BP and Amoco are pricey brands, and you will see the credit card back. The merger is welcome news for Chevron and other West Coast retailers because BP Amoco will not use price to retain market share, but they will market themselves as a premium brand and raise their prices."

Other analysts were more cautious, pointing out that Arco's retail approach has been an unqualified success. Besides, BP Amoco, which is acquiring Arco, has little experience selling gasoline on the West Coast, which is a unique market.

Because gasoline prices are substantially higher than elsewhere and, on the whole, people drive more, consumers here tend to be more price conscious.

"BP will be delighted to leave it exactly as it is," said Joel Fischer, an analyst with Burnham Securities. "They will be pleased that Arco's retail strategy has worked so well. They capitalized on the low cost of crude oil from Alaska, and they've marketed themselves exceptionally well. I suspect that the only people in management at Arco who may survive the merger are the ones in marketing."

Fischer, for one, expects BP to start competing on price. "Amoco used to be this old-fashioned, full-service operation, which stressed customer loyalty," he said. "But on the West Coast, price will be what matters."

Another possibility is a go-slow approach. "You can't change brand recognition overnight," said Paul Chen, an analyst with Lehman Brothers. "Not much will change at first, but over time they very well may."

Gradual change is also the prognosis of George Babikian, the retired Arco executive who originated the then-revolutionary approach to gasoline retailing.

"BP would be less than prudent not to continue with Arco's marketing strategy," said Babikian. "They might keep the Arco name for three years, and gradually introduce changes."

It was Babikian who, as president of Arco Products Co., eliminated Arco's credit card and introduced the company's cash-only policy. In addition, all stations were converted to self-service, and service bays were replaced with AM/PM mini-markets.

"We eliminated the credit cards to cut our costs and lower the prices," said Babikian. "By introducing the AM/PM mini-markets, we gave dealers another source of income than gasoline sales. The low margins on gasoline sales were compensated for by high margins on the mini-markets' sales, which in turn enabled us to charge leasing rates that were more compatible than before with the value of the properties."

Babikian's no-frills approach enabled Arco to sell gasoline at considerably lower prices than the competition, eventually making it the largest gasoline retailer on the West Coast. Currently, Arco has roughly 20 percent of the West Coast market and operates more than 1,700 gasoline stations in six Western states.

"The strategy worked," said Babikian. "In 1994-95, after I had retired, there was a brief glitch when the company brought in some consultants who said they should raise their prices. But when they saw their market share go down, they soon changed back."

Arco's pricing strategy has been helped by the company's access to huge quantities of crude oil from its Alaskan fields, making it less dependent on imported foreign oil. For example. Arco was able to keep its gasoline prices down during the Gulf War in 1990. when many of its competitors had to raise their prices in response to an increase of the price of crude oil on the world market.