Industrial giant General Electric Co and oilfield services company Baker Hughes, both beset by difficulties during oil's two-year price rout, may have a clear path out of the doldrums: join forces.
GE said Thursday it was in discussions with Baker Hughes Inc but not to acquire the company outright. Baker Hughes said Friday talks were ongoing. Both companies declined to comment on the talks beyond official statements.
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GE's oil and gas division has fought to get the scale the conglomerate enjoys in other industries. Despite efforts to grow through a series of acquisitions, the division has faced weaker revenues during oil's downturn than other units of GE. Organic growth in oil and gas has lagged other sectors.
Baker Hughes had its own growth difficulties, spending a year and a half stuck in limbo amid a $28-billion merger with Halliburton that was ultimately scrapped after opposition from antitrust regulators.
Following the termination of the Halliburton merger, Baker Hughes CEO Martin Craighead has said the company is well positioned to focus on developing products that lower costs and maximize production for operators in the oil and gas industry.
Baker Hughes shares gained 8.4 percent Friday to $59.12, valuing the company at about $25 billion.
With oil prices rebounding to $50 a barrel, M&A activity could tick up as investors see the two-year rout in crude ending. A partnership with Baker Hughes could allow GE's oil and gas division to transform itself into a larger player in the sector to better compete with oilfield services leader Schlumberger Inc , and could give Baker Hughes a chance to redefine itself following the failed merger.
���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. The partnership would be formed at a time GE has been shrinking its capital markets division and is returning to its industrial roots, he said.
For GE, which strives to be in the top of each industrial sector, oil and gas has been a harder area to develop, said Ed Hirs, energy fellow at the University of Houston. Baker Hughes offers good capitalization and scale for the smaller GE unit.
"This is a pretty good, intelligent bet on the future," he said, noting that it comes as the oil market's downturn appears to be ending. The downturn led oilfield service companies to cut their prices, curtailing profits.
Baker Hughes is "a much-emasculated industrial enterprise relative to its pre-HAL dalliance days," Bill Hebert, senior research analyst at Piper, Jaffray & Co, said in a note to clients.
Both companies have faced pressure from activist investors. ValueAct Capital is the largest shareholder of Baker Hughes, investing after the merger with Halliburton was announced and betting upon its success. After the collapse of that merger, ValueAct has remained Baker Hughes��� top shareholder.
Trian Partners is one of GE's largest shareholders, and has demanded that the company cut costs and be more disciplined about acquisitions.
The exact structure of a deal could determine the benefits for both sides. GE could gain breadth from Baker Hughes' strengths in downwell services, completion and artificial lift, while Baker Hughes could improve its services with technologies developed by other GE units, analysts said.
GE has forecast cost cuts at the division and has said it will "try to compensate" for the fact that the division has earned less than expectations given a year and a half ago. The company had purchased Lufkin, a pump maker, for $3.3 billion just one year before oil prices cratered.
"We still think it's a really good GE business," GE CEO Jeff Immelt said on the company's most recent earnings call. "I have every confidence we're going to come out of the cycle better than we went in."
(Reporting By Jessica Resnick-Ault with additional reporting from Terry Wade in Houston, Lewis Krauskopf, Michael Flaherty and Greg Roumeliotis; Editing by Nick Zieminski)