Private Empire: ExxonMobil and American Power by Steve Coll Page A

the “last brick in the wall of remaking Exxon,” he declared. 24
    That summer of 1998, Lee Raymond and Lou Noto intensified discussions about a recombination of the baby Standards they each led. There would be antitrust issues in the United States if they proposed a deal, but their lawyers advised them that if they sold off some retail gas stations and perhaps a few refinery properties, the deal should be approved. From Exxon’s perspective, the fit with Mobil was well tailored, particularly because the ends-of-the-earth map of Mobil’s oil reserves complemented Exxon’s more conservative profile, so heavily weighted in North America and Europe. Mobil’s holdings included substantial assets in West Africa, Venezuela, Kazakhstan, and Abu Dhabi. It also held important natural gas positions in Qatar and Indonesia. By purchasing Mobil, Exxon could scale up to compete with state-owned oil giants and leapfrog onto new geographical frontiers.
    Exxon had the currency—its own stock—to make such a gargantuan deal without incurring debt or financial risk. During the 1960s, Exxon had handled its cash flow conventionally, paying out most of its earnings as cash dividends. This practice rewarded small shareholders by providing them reliable income. The corporation had about eight hundred thousand such shareholders by the early 1980s. During inflation-menaced 1982, Exxon’s dividend was a hefty 10 percent. The next year, however, Clifton Garvin embarked on a campaign of share “buybacks” as a substitute for some of the spending on dividends. He was advised by Jack Bennett, a finance wizard and mentor to Raymond who left Exxon during the mid-1970s to work at the Treasury Department and then returned to the corporation’s board. He and Garvin concluded that after 1980 global oil prices looked fundamentally unstable. Given the volatility that seemed likely, it would be cheaper for at least a while for Exxon to buy oil and gas reserves by purchasing its own stock than by investing in long-term projects at a high price point. “We had a tremendous amount of cash and no debt, we were convinced that the price structure was unstable, and thus we had no other option,” Raymond recalled, but to buy back shares. Exxon management had long raised cash dividends to beat inflation, but Garvin, and later Rawl and Raymond, were reluctant to raise the dividend too much higher, to match the 5 and 6 percent payouts offered by Shell and British Petroleum, for fear that in a down cycle for oil prices “you can get yourself in a real squeeze on cash,” Raymond said. 25
    Each year, therefore, the corporation went into the stock market and used some of the cash generated by its operations to buy its own shares. Between 1983 and 1991, Exxon bought a net total of 518 million shares worth $15.5 billion—a whopping 30 percent of the shares then outstanding. 26 As a result, each remaining share owned by an investor controlled a progressively higher percentage of Exxon’s profits and oil reserves: In 1983, a single Exxon share owned 6.7 barrels of oil and gas equivalents, but at the end of 1989 it owned 8.4 barrels.
    During the buybacks, Exxon’s dividend yields fell in relative terms, leaving small shareholders with less cash in their pockets. Did this matter? Arguably, dividend payments and buybacks were equivalent—in one case, a shareholder received cash and in the other, the value of shares rose proportionately. One question was who would make better use of ExxonMobil’s cash, its executives or its dispersed shareholders. By the time he took charge of the corporation, Raymond answered emphatically, “We can.”
    Arguably, too, share buybacks could be justified only if the price of Exxon shares at the time of purchase was so low that buying them was a better use of cash than looking for new oil reserves. In the decades to come, however, Exxon would make buybacks continuously, in all price environments, joining an American corporate fashion.