Why General Electric and Baker Hughes Need Each Other

By Mergers and Acquisitions

baker hughes

(©2014 Ken Childress Photography)

General Electric (GE) CEO Jeff Immelt isn’t wasting any time. One week after the industrial giant told investors its oil and gas business was sucking wind, the company confirmed it is in partnership talks  with oilfield service giant Baker Hughes (BHI).  

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While GE clarified any deal would be a “partnership” not an “outright” purchase, it further deepens the Dow component’s commitment to its energy business, even as revenues in the unit are expected to drop 15% to 20% this year. Baker Hughes declined comment. 

“This has nothing to do about getting bigger in oil & gas but instead creating more ways to help the energy sector become more efficient,” Nick Heymann of William Blair & Company tells FOXBusiness.com. Heymann, who has covered GE for decades, explains the potential synergies. “They [GE] are trying to leverage Baker Hughes distribution to go onshore,” he said, which can help improve, for example, fracking capabilities.

Lorenzo Simonelli , president & CEO of GE Oil & Gas, already has a handful of similar partnerships with Diamond Offshore (DO) and National Oilwell Varco (NOV). All of which are part of a long-term goal to create an $8 to $10 billion oil and gas aftermarket service business by 2020, notes Heymann.

Shares of GE and Baker Hughes rose during mid-morning trading on Friday.  

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Another part of any deal may serve as a barometer for commodities. While off the yearly lows, oil and gas prices still remain near depressed levels, but a GE-Baker Hughes combo of some type may signal a bottom. “Usually when you see these types of deals happen it is a sign prices are bottoming,” said Phil Flynn of The PRICE Futures Group during an interview with FOXBusiness.com. U.S. crude prices are hovering around $49 per barrel, down 51% from the record high reached in 2014. 

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Not to mention, a partnership versus an outright merger could side-step a notoriously tough U.S. Department of Justice.

For Baker Hughes, it is déjà vu. The company’s plan to merge with Halliburton (HAL) in a $28 billion deal was terminated in May, with Halliburton Chairman and CEO David Lesar citing “challenges in obtaining remaining regulatory approvals…” among the reasons why. A month before, the U.S. Department of Justice sued to block the deal over concerns it would eliminate competition in the oilfield services industry.

In just the past week, the pace of mergers and acquisitions has spiked, making October 2016 the busiest on record for deals, according to Dealogic. This month alone companies have announced nearly $250 billion in deals. 

Suzanne O’Halloran is Managing Editor of FOXBusiness.com and a graduate of Boston College. Follow her on @suzohalloran.

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