In what is a bit of a surprise, GE and Baker Hughes announced an unprecedented merger. The deal structure alone is creative and unique. Unlike a traditional merger or acquisition, GE will contribute its oil-and-gas business and $7.4 billion in a special cash dividend to a new entity, which will be publicly traded with 62.5% owned by GE and 37.% owned by the existing Baker Hughes. Baker Hughes shareholders will get a onetime payment of $17.50 per share. Lorenzo Simonelli, chief executive and president of GE Oil & Gas, will be CEO of the new company. Immelt will be chairman and Baker Hughes CEO Martin Craighead will be vice chairman.

But what makes the merger truly interesting is the type of company that will be created. In effect, GE will now control Baker Hughes, which will be the world’s second-largest oilfield services company, with revenue projected at $34 billion in 2020. Baker Hughes is traditionally a service company, whereas GE is an equipment manufacturer. While GE is selling the deal to investors by saying that the combined entities will be able to enact substantial cost savings through reduction of redundancies, some analysts doubt that given the different nature of the two businesses.

What will make the deal unique though, is that GE will now be the only company in the world able to be a completely “fullstream” services company – i.e. it will be able to service all three areas of the energy industry, from molecule to megawatt. GE will essentially have the ability to find the oil, bring it out of the ground, and then turn it into electricity.

In addition, there are other synergies between the companies that may make the new entity a formidable player. GE has invested big in data and data processing. So, for example, using GE’s technology, Baker Hughes will now be able to monitor pieces of equipment in the field and tell when the equipment is likely to fail. This may result in increasing sales as oil companies can more proactively service their equipment rather than waiting for something to fail and being in a rig down situation. Some analysts, however, feel as though Schlumberger is already way ahead of GE on data.

Of course, all of this assumes regulatory approval. GE has already indicated they are willing to take any steps necessary to win approval. We will keep you posted as things develop.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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