Joining forces could be a clear path out of the doldrums for Industrial giant General Electric Co and oilfield services company Baker Hughes. Both the companies are beset by difficulties during oil’s two-year price rout.
While both the companies declined to comment on the talks beyond official statements, Baker Hughes said Friday talks were ongoing and GE said Thursday it was in discussions with Baker Hughes Inc but not to acquire the company outright.
The scale the conglomerate enjoys in other industries has been fought to be achieved by GE’s oil and gas division. The division has faced weaker revenues during oil’s downturn than other units of GE despite efforts to grow through a series of acquisitions. Organic growth in oil and gas has lagged other sectors.
Amid a $28-billion merger with Halliburton that was ultimately scrapped after opposition from antitrust regulators, Baker Hughes spend a year and a half stuck in limbo and had its own growth difficulties.
The company is well positioned to focus on developing products that lower costs and maximize production for operators in the oil and gas industry, said Baker Hughes CEO Martin Craighead following the termination of the Halliburton merger.
As investors see the two-year rout in crude ending, M&A activity could tick up with oil prices rebounding to $50 a barrel. To better compete with oilfield services leader Schlumberger Inc, and could give Baker Hughes a chance to redefine itself following the failed merger, a partnership with Baker Hughes could allow GE’s oil and gas division to transform itself into a larger player in the sector.
“If there’s a time to double down on the sector, now is the time given the prices we’ve seen,” said Jonathan Garrett, principal analyst for U.S. upstream research at Wood Mackenzie. He said that GE is returning to its industrial roots and has been shrinking its capital markets division and the partnership would be formed at such a time.
Ed Hirs, energy fellow at the University of Houston said that oil and gas has been a harder area to develop for GE, which strives to be in the top of each industrial sector. Good capitalization and scale for the smaller GE unit is offered by Baker Hughes.
“This is a pretty good, intelligent bet on the future,” he said. This partnership comes at a time when the oil market’s downturn appears to be ending, he noted. The downturn led oilfield service companies to cut their prices, curtailing profits.
Bill Hebert, senior research analyst at Piper, Jaffray & Co, said in a note to clients that Baker Hughes is “a much-emasculated industrial enterprise relative to its pre-HAL dalliance days.”
Pressure from activist investors has been faced by both companies. Investing after the merger with Halliburton was announced and betting upon its success, ValueAct Capital is the largest shareholder of Baker Hughes. ValueAct has remained Baker Hughes’ top shareholder after the collapse of that merger.
Trian Partners has demanded that the company cut costs and be more disciplined about acquisitions and it is one of GE’s largest shareholders.
The benefits for both sides could be determined by the exact structure of a deal. Analysts said that while Baker Hughes could improve its services with technologies developed by other GE units, GE could gain breadth from Baker Hughes’ strengths in downwell services, completion and artificial lift.
(Adapted from Reuters)