Bars to Merger of Hughes, Baker Not Foreseen : Regulators Expected to View Proposal as Good for the Industry

Wall Street analysts said Thursday that they do not expect federal regulators to throw serious antitrust roadblocks in the path of the proposed $1.2-billion merger of oil services industry heavyweights Baker International Inc. and Hughes Tool Co.

The merger, the largest ever in the oil services industry, would create a giant company with between $2 billion and $3 billion in sales and as much as 58% of the market for the heavy metal bits used to drill oil wells.

However, analysts said that if government antitrust regulators do object to the new company’s commanding market share for drill bits, they would expect one of the two companies’ drill-bit manufacturing units to be sold, perhaps Baker’s Reed Tool division.

A potential buyer in this scenario, according to the analysts, is Dresser Industries’ Security division, a direct competitor of both Hughes and Baker in the drill-bit market. Dresser officials could not be reached for comment.

Dresser Industries currently has about 10% to 12% of the worldwide drill bit market. Combined with Reed Tool, Dresser would have nearly 25% of the market and would be a formidable competitor to both Hughes and Newport Beach-based Smith International Inc., which has about 23% to 27% of the market.

Hughes and Baker officials said the companies are willing to consider any recommendations made by regulators and will react depending on their proposals. “We don’t have a ‘we gotta have it all or we can’t do it’ attitude,” said Ronald Turner, Baker spokesman.

The proposed merger prompted Moody’s Investor Service Inc., a major bond-rating firm, to review Baker’s debt ratings for possible downgrading and Hughes’ for possible upgrading. Wednesday Standard & Poor’s placed both companies on its “Credit Watch” list with “positive implications” for Hughes and “negative implications” for Baker.

Meanwhile, the stock market reacted to the proposed creation of the Baker Hughes company with a bit of a yawn. Shares of both companies gained 37.5 cents in moderate trading on the New York Stock Exchange. Baker closed at $10.75 on volume of 462,000 shares and Hughes closed at $8.125 a share with just 700,700 shares changing hands.

Analysts said that because the $1.2-billion deal announced Wednesday is tied to the companies’ current market values and involves no premium for current shareholders, the merger proposal was not likely to spark much interest in the issues.

Nevertheless, analysts said shareholders of the new company would eventually reap potentially significant rewards since the merger is designed to eliminate idle plant capacity and overlapping management personnel with a series of cutbacks.

Virtually all of the cuts would fall in Houston, where both companies maintain the majority of their operations. Baker said it has no immediate plans to close its Orange headquarters where it has a staff of 35.

Analysts said the new company, which would be the third largest oil services concern in the world, would be well-poised to take advantage of any upturn in the persistently depressed oil market. By cutting costs and merging staffs now, the analysts argued, Baker and Hughes will be financially able to move when drilling for new oil wells picks up. Drilling is currently at one of its lowest rates since World War II.

Hughes, the industry leader, has an estimated 42% to 46% of drill-bit sales, and Baker’s Reed Tool division has an estimated 10% to 12%.

Despite the market share, analysts said the regulators are apt to approve the deal because the oil industry is so depressed and is suffering severely from having too much manufacturing capacity.

James Carroll, an analyst with Paine Webber Inc. in New York, said regulators would go lightly on the merger because of the oil industry’s severe problems.

“The state of affairs in the industry is so dismal that putting the two companies together is more to enhance or assure their survival than to dominate the market,” Carroll said. “If anything, you can argue that this would be more competitive.”