Baker-Hughes Venture Sets Wall Street Buzzing With Talk of Oil Service Mergers
Wall Street these days is abuzz with talk of oil service company mergers, both real and imagined.
In the wake of Wednesday’s announced merger of Orange-based Baker International Inc. and Hughes Tool Co. of Houston, the scuttlebutt seems to be hitting the Street faster than you can say “rock bit.”
Acquisitions, joint ventures and similar combinations are nothing new to this deeply troubled industry.
But as oil prices continue to linger well below what it takes to make domestic drilling pay off, the Street is now expecting to see more mergers on the scale of the giant Baker-Hughes deal. That $1.1-billion stock swap would create a company with more than $2.5 billion in annual sales.
For example, some folks think the next big merger will include Dresser Industries Inc. and the Halliburton Co., according to Sam Albright, of Kidder, Peabody & Co. The two Dallas-based companies are in the process of putting together a joint venture, but a merger of the two is but mere speculation, he said.
Good Candidate
But, as speculation goes, one of the more interesting tidbits to surface in the wake of the Baker-Hughes deal last week is one Wall Street analyst’s opinion that Newport Beach-based Smith International Inc. is a good candidate for a takeover, with Dresser Industries as its likely suitor.
“Smith has to end up being acquired,” said Philip Meyer, of F. Eberstadt & Co. in New York, who added that whatever decision the Justice Department renders concerning the antitrust implications of the Baker-Hughes combination will affect the possible acquisition of Smith.
“If this merger is allowed to go through, Dresser would be encouraged to pick up Smith,” Meyer said. “If the regulators don’t challenge one takeover, why challenge a smaller one?”
Kevin Simpson, an analyst with Drexel Burnham Lambert, agrees that a merger eventually could take place, depending on how the antitrust regulators view the estimated 55% share of the market for rock bits that the new Baker-Hughes venture will control. A Dresser-Smith combo would tie up an awful big chunk of the rest.
“I think that it’s a real possibility,” Simpson said, stressing that Dresser and Smith nevertheless would fit well together. “Anybody who follows the industry will come to that logical conclusion.”
Spokesmen for both companies say no discussions are under way, but some investors must think something is up because Smith shares this week have broken through the $3 barrier on the New York Stock Exchange for the first time in months.
Smith stock, which traded for as much as $70 a share in the early 1980s, crashed to an all-time low of $1.25 a share in March after Smith filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Smith sought the protection from its creditors after a federal judge ruled that it should pay a staggering $204 million to arch-rival Hughes Tool for infringing on a patent Hughes held. A federal appeals court in Washington is expected to consider Smith’s appeal of the patent-infringement judgment in December.
On Friday, Smith closed at $3.625 a share in trading on the New York Stock Exchange, up 62.5 cents a share for the week.
“The stock has been acting strongly lately,” said Jeff Freedman, who follows the oil services group for Smith Barney, Harris Upham & Co. “There must be a lot of people who still think they are going to settle, but they are probably wrong.”
And there is no small speculation that with Baker in the driver’s seat at Baker-Hughes, an out-of-court settlement may be reached that would reduce the damages Smith must pay. Meyer, of F. Eberstadt, notes that E.H. Clark, Baker’s chairman, has said that allowing Hughes to patent the o-ring was like “allowing someone to patent breathing.”
A settlement of the judgment, or its rejection by the appeals court, would be important for a merger because the $204-million judgment--almost $9 for each of the 22.7 million shares of Smith stock now outstanding--is a real obstacle in the way of any deal.
