Business

Would a bid be good or bad?

BBC business editor Robert Peston on the chances of a bid for BP

BP this morning confirmed - among other things - that it has floated 587.12 miles of "containment boom" on the waters around the Gulf coast. So this famous shoreline is framed with inflatable plastic tubing longer than the distance from Edinburgh to Paris, to help prevent oil washing up on the beaches of Mississippi, Louisiana, Alabama, Texas and Florida.

I think we can safely conclude that manufacturers of this stuff, among others, are becoming rich on the back of the impoverishment of BP's shareholders. And with $3.5bn already spent by BP on limiting the impact of the Deepwater Horizon oil spill, BP is responsible for something of a mini Keynesian stimulus in the South East of the US.

Not that anyone with common sense expects the local community - rightly fearful for its fishing industry, tourism and wildlife - to be grateful. But it is an iron law of business that an ill wind usually creates business opportunities.

The most obvious manifestation of that dictum are the corporate vultures circling BP, attracted by a share price that's 42% where it was before the debacle in April - although in the last few days BP's market value has increased by more than a quarter.

At the head of the ominous colony of potential scavengers and predators are Exxon, the world's biggest oil company, and Chevron. They're salivating over all BP's assets, but especially its huge US operations.

And then there's a Godfatherish quote in this morning's FT from the head of investor relations at PetroChina, the largest listed oil and gas producer in China:

"Our first reaction was how to help BP to quickly fix the problem... If there was some opportunity to work more closely together, we would welcome that".

Now, in a rational world, BP would be completely invulnerable to the circling hordes of hunters. Because the owners of the company, its shareholders, would be bonkers to even contemplate selling until they can quantify the long-term damage from the debacle, which is the sine qua non of establishing a fair price for the company.

It is, for example, perfectly possible to construct an argument that says the fair price for BP is only a few percentage points below where it was before the leak, even if the financial costs of the clear-up and compensation are well over $20bn - so long as you see those costs as, in effect, an increase in BP's long term debts or gearing.

But of course markets are not great repositories of rational thinking and behaviour, as I think we've had confirmed (if such were needed) over the past few volatile years.

So the board of BP was badly shaken when the implicit cost of borrowing for the company soared last month, because of apocalyptic fears that the pollution would never be staunched. And the directors are painfully aware that the ownership of the company will shift inexorably towards hedge funds and speculators who are only in it for the promise of a takeover or similar "value enhancing" deal.

As of now, however, the BP board appears to be holding its nerve - and concentrating all efforts on plugging the leak. Questions such as "who should own BP?", "who should be its chairman and chief executive?" and "should BP issue new equity?" have been put on the "apr├Ęs le deluge" list of business, when the permanent wreckage to reputation and financial prospects can be more calmly assessed.

In fact, the directors should probably be grateful for the speculation about opportunistic takeovers - because it has, for the first time in weeks, put some positive momentum behind the price of its shares and debt. That creates a slightly more benign financial climate for multi-faceted, climactic efforts to put a new cap on the leak, siphon more from the failed blowout preventer and - in a matter of weeks - stuff the leak up with "heavy" material.

During this short respite, before BP faces some kind of takeover bid (which it's reasonable to assume will surface in the autumn), governments and investors need to consider whether one lesson of this monumental mess is whether big is altogether good in oil.

Is there a credible case for saying that the bigger the company, the smaller the sense of personal responsibility over any well of that company's chief executive, and the greater the risk of disaster? Are the cost advantages of scale offset by the heightened risks stemming from the elongated chain of responsibility that also comes with scale?

It is at least moot whether the long term stable solution for BP is to subsume this already huge business into another company so enormous as to defy comprehension.

Quite apart from the traditional arguments about the harm to consumers from any diminution of healthy competition, mightn't the risks for investors and for society of further calamitous accidents be maximised if BP were devoured by another oil monster?

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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