ChevronTexaco acts speedily to beat off rivals for Unocal

The Oil giant giant ChevronTexaco signalled a return to merger activity in the booming oil industry yesterday, agreeing to buy its smaller rival Unocal for $16bn (£8.5bn).

The much-anticipated move was speeded up by rumours that other companies were circling the California-based Unocal, such as Italy's oil company Eni, and China National Offshore Oil Corporation. The chairman of Chevron, David O'Reilly, predicted Unocal would "fit like a glove" with his company.

Chevron, the second-largest oil company in the US, will be able to add Unocal's natural gas reserves in Indonesia and its stake in an oilfield in Azerbaijan to its operations.While both businesses are seen as having potential, analysts said Unocal was not big enough to make decent margins.

Chevron already has sizeable exploration and production operations in Indonesia and elsewhere in Asia. Mr O'Reilly said in a conference call with analysts: "I am very excited about this transaction both for the immediate and long-term benefits."

Chevron's purchase, which includes taking on $1.6bn in debt, comes after China's third-biggest oil producer stalled in its pursuit of Unocal. Speculation that the company ­ the ninth-largest oil producer in the US ­ would become a bid target has pushed up its share price by almost 50 per cent this year, closing at $64.35 on Friday.

The shares sank $4 in morning trading yesterday, while Chevron's stock dropped nearly $2 to $58.

Analysts expect the transaction, 75 per cent in stock and 25 per cent in cash, to be the first of several major mergers among oil companies, which have been amassing cash on their books from the record price of oil. The last major set of deals was in the Nineties, when Exxon and Mobil merged, Britain's BP bought Amoco, and Chevron and Texaco combined their businesses.

Chevron will cut costs from joining the two operations, including slashing the headcount. Mr O'Reilly said: "Clearly there will be some redundancy because, for example, we don't need two corporate headquarters, and there are areas where we have overlapping operations."

Chevron has about 47,000 employees worldwide. Unocal employs 6,600 people.