Baker Likely to Sell Its Drill Bit, Pump Divisions : Seeks to Allay U.S. Concern in Proposed Merger With Hughes

Baker International Inc. probably will sell its drill-bit and pump-manufacturing operations in an effort to allay U.S Justice Department antitrust concerns about its proposed merger with Hughes Tool Co.

James D. Woods, president of Orange-based Baker, said Monday that he is optimistic about the chances of reaching a mutually acceptable resolution with the Justice Department.

On Sunday the department threatened to file a lawsuit to block Baker’s merger with Hughes. The federal agency said Baker must divest its tricone oil-field drilling bit and electrical submersible pump operations to prevent market domination by the combined companies. Woods said that federal regulators first told Baker informally on Friday about their objections to the merger and that negotiations had begun over the weekend.

Baker Vice President Ron Turner said that even with the divestitures demanded by the Justice Department, the merger of Baker and Houston-based Hughes Tool would be “unquestionably worthwhile.”

The drill-bit operation accounts for about 12% of Baker’s revenues while the pump operations account for about 3%, according to Herbert Hart, a securities analyst with the investment firm of Rowe & Pittman Inc. in San Francisco. Drill bits were historically a much larger part of Baker’s business. But exploration worldwide has dropped as oil prices tumbled.

James Crandell, vice president and oil service industry analyst with Salomon Brothers, said, “I feel pretty strongly it (the merger) will come off.”

Crandell figures that the proposed divestitures would cut by 30% to 35% the $100-million annual savings expected to be derived from the merger. But he added that Baker and Hughes Tool could benefit from using proceeds from the sale of the Baker drill-bit and pump-manufacturing units to pay down their considerable debt.

Elizabeth Peek, managing director of the New York investment firm of Wertheim & Co., said the divestitures would delay by “one or two quarters” the return to profitability of the merged companies. Had the merger been allowed to proceed intact, Baker officials had predicted, the combined firms would have started to break even by the fourth quarter of this year.

Pump Stance Unexpected

While Hughes Tool and Baker together would claim about 53% of the nation’s drill-bit market, Crandell said, the figure would drop to 36% after the sale of Baker’s Reed Mining Tools unit. But the merged companies would still rank as the lead player in the bit-manufacturing business.

Many industry observers had expected that the Justice Department might balk at the merger of the drilling-bit operations at Hughes and Baker.

But many of these securities analysts, as well as officers of both companies, were surprised to learn that the federal regulators were also concerned about creating a potential monopoly in the submersible pump business.

Analysts said that Hughes, with about a 26% share of the nation’s submersible pump market, is the second largest pump manufacturer, while Baker ranks third with a 4% market share. None of the analysts contacted Monday believed that the sale of Baker’s submersible pump business would cause the company a hardship.

The stock market was not shaken much Monday by the Justice Department’s action. In trading on the New York Stock Exchange, Baker stock closed at $13.625 a share, down 50 cents, while Hughes Tool closed at $10 a share, slipping just 37.5 cents.

‘Smooth Sailing’ Unlikely

“I don’t think any analyst would expect you would have completely smooth sailing” with a proposed merger of such magnitude, said M. Craig Schwerdt, senior vice president with the Los Angeles-based investment firm of Morgan, Olmstead, Kennedy & Gardner.

Schwerdt and other analysts said they expect the Justice Department to show some sympathy toward consolidation efforts such as the Baker-Hughes merger in order to aid the deeply depressed oil services industry. “It makes sense economically to reduce the excess manufacturing capacity in the industry,” Schwerdt observed.

“There really is no question that if the oil industry is to survive on a healthy basis there has got to be some consolidation,” said William Barnett, a Houston lawyer and former chairman of the American Bar Assn.’s antitrust section.

“I would not read into (the Justice Department’s position on the proposed Hughes-Baker merger) that the (Reagan) Administration has the old-time anti-merger religion,” said Howard Adler Jr., another prominent antitrust attorney in Washington.