General Electric announced Oct. 31 it would combine its oil and gas division with Baker Hughes in a $7.4 billion dollar deal to be completed in mid-2017.
The deal will make a company second in size globally to Schlumberger in the oil and gas business.
The merger combines two companies that do fundamentally different things. Baker Hughes’ specialty is horizontal drilling and hydraulic fracturing, a process of pummeling shale rock with minerals, chemicals, and water. GE Oil and Gas manufactures equipment.
GE is a global giant that includes divisions that complement the oil and gas division, namely aviation and data analytics, in addition to power generation. Experts believe the merger will give the new company an edge over rivals Schlumberger and Halliburton.
Shareholders in both companies will profit from the deal, even though right after the merger announcement share prices in Baker Hughes fell more than 6 percent. The GE merger with Baker Hughes will mean that shareholders in GE will own 62.5 percent of the new company. Shareholders in Baker Hughes will get 37.5 percent of the newly formed company and each shareholder will get a one-time dividend of $17.50 for each share they own.
Baker Hughes has seen its company-wide revenue fall nearly 40 percent in 2016. The price of a barrel of oil fell to less than $30 a barrel earlier this year. The third quarter earnings of the oil and gas division of the company were down almost 25 percent.
Almost six months ago, GE sought a merger agreement with Halliburton but the deal fell through in a regulatory dispute with the U.S. government. This merger puts Halliburton third in size in the world oil market.
GE has sought to redefine itself as a technology company and move away from it’s traditional appliance businesses, selling off that part of the company. The Baker Hughes deal further transforms the company into one that focuses on the technology of the oil field. GE and Baker Hughes expect the annual earnings of the new company to be $32 billion.
The merger, however, means workers at both companies will lose their jobs, as the new entity will seek to eliminate redundant positions.
According to a news release from Baker Hughes, the “new” company is “expected to be accretive to GE 2018 earnings per share by approximately $.04; synergies of $1.6 billion expected to be realized by 2020.” It goes on to say “By drawing from GE technology expertise and Baker Hughes capabilities in oilfield services, the new company will provide best-in-class physical and digital technology solutions for customer productivity.”
GE Chairman and CEO Jeff Immelt, when the merger was announced on the GE website said. “As we built the GE oil and gas business, I have always been impressed by the respect our customers have for Baker Hughes. GE oil and gas is a key GE business, one that fully leverages the GE store.
"As we go forward, this transaction accelerates our capability to extend the digital framework to the oil and gas industry. GE investors will benefit through ownership of a stronger business with substantial synergies and an improved competitive position.”
The “new” Baker Hughes will have headquarters in London and in Houston.
Representatives for Baker Hughes declined to comment.