GE's Oil Division Wants to Merge With Baker Hughes — But Will the Feds Approve?
Baker Hughes got knocked to the mat pretty hard when its planned merger with Halliburton — a longtime rival in the oil field services industry — fell apart in the face of U.S. Justice Department antitrust qualms earlier this year. But the Houston-based oil field services company is once again reportedly preparing to combine forces, with General Electric's oil division, according to various reports.
The news isn't a surprise, by any stretch of the imagination. There have been rumblings that GE might step up as the new suitor ever since the Justice Department came out against the original proposal to combine Halliburton and Baker Hughes in April.
The feds arguably had reason to look askance at the pitch to allow the second- and third-largest oilfield service companies in the United States to become one mammoth company, but they took their time coming to this conclusion. Halliburton announced the $34 billion agreement in November 2014, but the two companies then spent more than two years spinning their wheels as they waited for Department of Justice approval that never came.
When the deal with Halliburton was in the works and still seemed like a real possibility, Baker Hughes, as the company being acquired, made room for Halliburton by laying off employees and selling otherwise profitable businesses in anticipation of a merger that was ultimately doomed. Once that agreement officially fell apart, Baker Hughes was left in a tricky situation, since it now had gaps in its own company structure at the same time that oil prices were still slumping.
Thus, GE entered the scene with a long history in the oil industry — although it hasn't been as much of a focus for the Boston-based giant in recent years — and ready cash to put on the table.
Now, it looks like these two have found a way to make a deal. In exchange for about $30 billion, GE will expand its oil business by teaming up with Baker Hughes, the third-largest oil field services company in the United States. If the deal goes through, the new company would bring together a slew of capabilities in everything from oilfield services and equipment manufacturing to technology, according to a GE statement.
“Baker Hughes obviously has been vulnerable since, but really this is a strategic decision by GE,” Ed Hirs, an energy economist at the University of Houston, says. “GE has forever said that its success is in being number one or two in the markets in which it plays. It was not at the top of the market in this industry before, but with this combination with Baker Hughes, it will be.”
The thinking goes that by working together, the two companies will be able to compete with Schlumberger and Halliburton, the two largest oilfield service companies in the United States, Reuters notes. But at the same time, this new entity may not offend the Justice Department's antitrust sensibilities the way the previous offer did.
For one thing, this merger makes sense based on the current state of the oil industry itself. Prices have finally rallied, giving some people enough hope to believe the downturn is finally drawing to a close. But even if this proves to be the case, the oil industry has gone through a rough couple of years.
More than 100 oil field service companies in North America have declared bankruptcy in 2015 and 2016, while oil exploration companies were forced to slash millions in spending on exploration to help get them through the worst financial plunge the industry has seen in decades. More than 350,000 jobs were cut globally as the industry streamlined and worked to pare down costs enough to deal with nosediving oil prices.
Once the deal is officially closed — it's expected to be inked sometime in the middle of next year — GE will end up owning about 62 percent of the new company. Meanwhile, Baker Hughes CEO Martin Craighead would be vice chairman while Lorenzo Simonelli, CEO of GE Oil & Gas, would have the same position at "the new Baker Hughes" according to GE head honcho Jeffrey Immelt. The new iteration of the company would have headquarters in both Houston and London.
However, it's looking like GE and Baker Hughes have a decent chance of pulling this merger off since the two companies don't overlap so much as complement each other, as Bloomberg observed. That should make the feds much more simpatico with this combo.
The DOJ should look more kindly on this merger, simply because the underlying businesses don't compete that much. "There's some synergy between GE and Baker Hughes, but they don't have any real overlap,” Hirs says. “Basically, by combining the two companies you're not increasing the concentration in the business lines, because the lines don't overlap. With the other deal, you would have been removing a competitor, but you're not doing that with this one.”
Since Baker Hughes has already been through this before, perhaps the company won't have to make any more cuts or alter itself too much to fit with GE.
And fingers crossed that the folks over at Baker Hughes insist on an if-this-falls-apart prenup like the $3.5 billion one they had with Halliburton. There's certainly no harm in hedging your bets, especially when you're betting companies, millions of dollars and, you know, people's jobs. It just makes sense.
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