Oil's Troubled Waters - MOL: The TVK Acquisition

In 2000, Hungary's biggest oil company MOL found itself partially blindsided by the manoeuvres of unnamed outsider investors to acquire control of TVK, a Hungarian chemical company and a vital downstream partner for MOL. Associate Professor of Marketing Miklos Sarvary offers this compelling case of how a former state-owned monopoly faced multiple threats to its plans for dynamic growth in a totally new economic environment. With a simultaneous crisis hitting the corporation's gas division, MOL's board had little time in which to act decisively. But what should they do?

by Miklos Sarvary, Endre Szabo
Last Updated: 01 Dec 2014

MOL, by far Hungary's biggest oil and gas company, dates back to the late nineteenth century. But in 2000, the local giant found itself partially blindsided by the manoeuvres of unnamed outsider investors to acquire control of TVK, a Hungarian chemical company and a vital downstream partner for MOL.

These mysterious investors had actually bought a large stake in another major Hungarian firm, Borsodchem, that at the time held a sizable stake in TVK. MOL's CEO Zsolt Hernádi was alarmed to learn that larger acquisitions by this group in Borsodchem were being planned. This unexpected development was quite possibly a serious threat to MOL's long-term desires for significant retail expansion in the region. Coupled with a simultaneous crisis hitting the corporation's gas division - one that was devastating MOL's share valuation - MOL's board had little time in which to act decisively. But what should they do?

Associate Professor of Marketing Miklos Sarvary offers this compelling case of how a former state-owned monopoly -nationalised and broken up into different divisions of the Hungarian Soviet Oil Company in the 1940s - faces multiple threats to its plans for dynamic growth. The government's controlling interests in MOL were sold off quite rapidly in the 1990s. (Overall, Hungary was well ahead of most neighbours in this regard.) Foreign investment analysts were singing its praises as both assets rich and competently managed. Senior management saw the imminent privatisation of many of the region's national oil companies as a unique opportunity for rapid expansion out of MOL's domestic market.

The author points out some of the manifold challenges that expansion poses for larger firms in the Central and Eastern European arena, even for industries such as gas and oil that were seen as having great growth potential. MOL had closed many of its non-core operations; expanded its regional services network, and slashed the number of senior managers.

But paradoxically, MOL's core activity - its gas business - began to be a drag on assets. Pundits worried that its gearing levels were excessive as a result. The Hungarian government's price cappings in 2000 saw shares fall a further 10%, with MOL threatening legal retaliation.

Prof. Sarvary explains the high value TVK held for MOL, being the main local supplier of two vital processes in the petrochemical value chain. TVK had been an early entrant and was considered a blue chip stock on the Budapest bourse. It was also seen as being an exceptionally well and progressively run corporation, and was attracting a good many international financial investors. (As opposed, perhaps somewhat surprisingly, to the regional oil marketing and retail sector as a whole.)

The study ends with a description of the varied and quite troubling decisions that a suddenly cash-poor MOL faced in 2000. Russian petrochemical giant and MOL joint venture partner Gazprom was making little secret of its desire to acquire as many interests in the region as possible as quickly as possible - had they been the the shadowy mass purchasers of TVK shares?

With nothing like the clout of Gazprom, should MOL have invested heavily and at some risk in TVK to maintain some level of control over its critical downstream partner? How could the company be sure this would be worth the gamble? Moreover, was this unplanned diversification really in keeping with MOL's regional grand strategy?

The study also includes extensive tables, graphs and charts detailing MOL's status at the time, as well as contemporary macroeconomic data on countries in the region, and on global petrochemical operations.

INSEAD 2004

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