Cost Cutting Amid Oil Glut : Baker, Hughes Tool Agree to a $1.2-Billion Merger
Offering fresh evidence of the severe depression in the nation’s oil industry, Orange-based Baker International and Hughes Tool, two of the largest makers of oil-drilling equipment, said Wednesday that they have agreed to merge in a $1.2-billion stock transaction.
Analysts said the combination, to be called Baker Hughes and based in Houston, would be the largest merger ever in the oil services industry.
The companies said the merger would allow them to consolidate their excess manufacturing capacities, reduce operating costs and better weather what is expected to be continued disruption in world oil prices and drilling activity.
Despite the cost-cutting tone of the merger, it will have almost no effect in Southern California because Baker, although based in Orange, has virtually all of its domestic operations in Houston, where Hughes is based.
Baker has just 35 employees at its Orange headquarters facility, and 24 of them are assigned to a mining subsidiary. That unit may stay in Orange after completion of the transaction.
Because of the persistent oil glut, oil service companies are now serving the lowest level of oil drilling activity since World War II, according to a recent count of active domestic oil rigs.
If approved by federal regulators, the deal would combine the world’s third largest oil services company, Baker, with Hughes, the world’s fifth largest, to create what would still be the third largest oil services company, behind Schlumberger Ltd. and Halliburton Co. But, as one Baker official noted: “Now we’ll be 90% the size of Halliburton, not just 50%.”
In 1985, Hughes, the company founded in 1909 by Howard Hughes Sr., had sales of $1.3 billion and a profit of $4.1 million. Baker had sales of $1.9 billion and profits of $87.7 million. For the first nine months of their current fiscal years, Hughes had sales of $590 million and a loss, including steep write-downs, of $507.5 million, and Baker had sales of $1.2 billion and a loss of $250 million.
Analysts generally praised the merger for bringing together two strong companies that have faltered only because of the severe oil depression. And some predicted a strong future for the new company once the oil industry turns around.
Sam Albright, an analyst with Kidder Peabody & Co. Inc., who in July said a merger of Baker “with a strong competitor” was a good possibility, called the merger a “blockbuster deal.”
“We have been forecasting a level of drilling activity worldwide that will not allow a lot of companies to earn a competitive return on capital for several years,” he said. “Clearly, Hughes was not going to prosper by itself in the kind of environment we are looking forward to over next two to three years.”
John Curti, of Birr Wilson & Co., a San Francisco investment firm, said he expects the new company to quickly move to lay off unneeded workers, including managers, and close unnecessary manufacturing plants. But because of the consolidation, Curti said, the new company will be better able to survive this downturn and will “will be able to make a tremendous amount of money on lower volumes” once the industry rebounds.
Clark to Be Chairman
The deal calls for Earnest Hubert Clark Jr., the current chairman and president of Baker, to become chairman of the new company. Known as “Hubie” to his friends, Clark has won high marks on Wall Street and throughout the oil industry for his strong leadership style.
Hughes Tool Chairman W.A. Kistler Jr. will become vice chairman and J.D. Woods, Baker’s current chief executive officer, will become president and chief executive of the new company.
Although the merger raises anti-trust issues because the two companies both service oil drilling rigs, analysts said they do not expect the deal to encounter problems obtaining federal approval because the product lines are sufficiently distinct.
Hughes primarily makes drill bits. Baker’s product line includes pumps, devices for controlling oil and gas flow, as well as various equipment used both in testing and drilling new wells.
Albright said he believes that the merger is not likely to run into any problems, if for no other reason than the industry is in such bad shape, and the regulators today are more pro-business. “I would put a 60% to 70% probability on it going through,” he said.
Officials from both companies said the merger is not expected to have any effect on the ongoing patent infringement litigation between Hughes and Smith International Inc., the Newport Beach oil services equipment maker. “These are two separate matters,” a Hughes spokesman said.
‘Someone We Know’
However, insiders at Smith said executives there were quite pleased to hear of the merger and with the prospect that Clark, long a friendly competitor, would be at the helm of the new company. “He’s someone we know and someone we’re friendly with,” the source said. “The feeling here is that he is someone we can talk to and perhaps get negotiations going again.”
Earlier this year, Smith declared bankruptcy rather than pay Hughes the $204-million settlement it was awarded for winning a patent infringement suit against Smith. Since then, the two companies have made little progress toward negotiating a settlement amount that ailing Smith could afford to pay Hughes.
Not everyone was pleased with the merger, however. Shortly after the deal was announced, Standard & Poor’s Corp. said it placed both companies on its “CreditWatch” list, with “positive implications” for Hughes and “negative implications” for Baker.
The New York-based debt rating service said it may upgrade ratings on about $288 million in long-term debt Hughes owes as a result of its “combination with a financially stronger entity.” Hughes’ senior debt currently is rated B-plus, while its subordinated debt carries a B-minus rating. Neither are considered investment-grade securities.
Under terms of the agreement, each outstanding share of Hughes common stock will be converted into 0.8 of a share of common stock in the new, combined company. Each outstanding share of Baker stock will be converted into one share of common in the new company.
Modest Gains on Stock Market
The formula gives Baker’s current shareholders 61% of the new company.
Borg-Warner Corp., which holds 18.6% of Hughes’ outstanding stock, has agreed to vote in favor of the consolidation.
Shares of both companies posted only modest gains on the New York Stock Exchange, testifying to the extraordinary secrecy with which the merger was apparently executed.
Baker closed the day at $10.375 a share, up 12.5 cents on modest volume of only 86,000 shares traded. Hughes gained 12.5 cents to close at $7.75 a share on 210,000 shares traded.
Under terms of the agreement, each stockholder of record of Baker and Hughes as of Wednesday will receive 3 cents and 5 cents, respectively, as the redemption price of certain stock rights.
In addition, Baker on Wednesday declared a quarterly dividend on its common stock of 8.5 cents a share to stockholders of record Nov. 3, payable Nov. 21. This payment, together with the 3-cent rights redemption per shares, will equal the regular 11.5 cent quarterly dividend.
Hughes withheld its regular 2-cent-per-share dividend, in view of the 5-cent-per-share redemption payment.
HUGHES / BAKER AT A GLANCE
Annual Nine-month Price per Share Earnings Earnings 10/22/86 12-month range HUGHES TOOL 1986 N.A. --$507.5 million $7.75 $6.75-$13.375 1985 $4.1 million $3.5 million BAKER INTL. 1986 N.A. --$250 million $10.375 $8.875-$18.125 1985 $87.7 million $61.7 million
Market Value on 10/22/86 HUGHES TOOL (1986) $432.4 million BAKER INTL. (1986) $726.2 million
