The downturn in crude oil prices for most of the past two years has taught the major players in this space a valuable lesson: partner up to weather the cycle. GE (NYSE: GE) and Baker Hughes (NYSE: BHI) are doing just that in a merger that creates the world's second-largest oilfield services provider with roughly $32 billion in revenue. Halliburton (NYSE: HAL) had tried and failed to acquire Baker Hughes not long ago, but US and European antitrust regulators stopped the $28 billion deal in May. The newly merged company’s chief rival, Schlumberger (NYSE: SLB), reported over $35 billion in 2015 revenue and in April acquired Cameron, a provider of flow equipment products, systems and services, for roughly $15 billion.
Energy M&A deal flow by quarter
The volatility in the energy sector has created a significant uptick in deal value of late, according to PitchBook's 3Q M&A Report. However, the overall value of energy M&A this year through 3Q was $3 billion (1.9%) behind the same period in 2015.
In order to appeal to oil & gas customers looking to improve efficiency amid the recent price slump, partnerships have become necessary to cut costs and expand services. And both GE and Baker Hughes have novel ways of getting better value out of the services they offer.
GE's oil & gas business provides oilfield equipment, more than any other company in the world, and supplements it with data processing services. The company’s operating system, Predix, is designed to increase productivity in the field, and the deal could also drive increased adoption by more contractors. On the other hand, Baker Hughes specializes in horizontal drilling and using chemicals for fracking. This complementarity means the merger could face an easier review process than Halliburton's deal earlier this year.
GE chairman and CEO Jeff Immelt has said the two companies hope to cut about $1.6 billion in costs annually by 2020. As part of the offer, GE has agreed to give Baker Hughes shareholders, who have yet to approve the merger, a cash dividend of $17.50 per share and a 37.5% stake in the new public company.
Lorenzo Simonelli, CEO and president of GE’s Oil & Gas, will be CEO of the merged company, with Immelt serving as board chairman and Baker Hughes CEO Martin Craighead serving vice chairman. The deal is expected to close in mid-2017.
Investors have had a muted response to the news. Baker Hughes shares were down 6.3% at $55.40 at Monday's close. The stock had jumped 7% to $54.55 following The Wall Street Journal's report of deal talks Thursday. GE’s shares were down 0.4% at $29.10 in light trading.