Team Energy DaisThe Announcement of Baker Hughes GE Merger
General Electric (GE) has done again, what it probably does best, buy out competition and then inch towards a monopoly in the industry! It has been more than three months since it merged its oil and gas division with another oil and gas giant, Baker Hughes, and has acquired 62.5 per cent of the combined company. The ripples of these two behemoths joining hands will impact the industry for years to come. In fact, it has already started. The merger has directly resulted in doubling the new company’s size to 70,000 employees and its operations in 120 countries.
BHGE (Baker Hughes, a GE company) is going to combine the strengths of both companies to essentially provide end-to-end solutions to other firms mainly in the domains of Oilfield Services like Oilfield Equipment, Digital Solutions, and Turbomachinery and Process Solutions. Market monopoly and employee strength aside, how does this merger really impact the BHGE, its employees, and various stakeholders? We break it down for you.
Baker Hughes has been around for a century and its fortes are supplying products and services to the oil and natural gas industry for oil speculation, drilling, transporting, processing and more. But, much like other oil and gas giants, it could not escape losses worth millions of dollars because of the oil slump of recent years. And what do big players do to counter long and mid-term debts? They re-engineer and restructure their businesses. This merger to create the world’s second-biggest oilfield services business (only behind Schlumberger in terms of revenue and headcount) is one of the clearest signs that the energy sector too is headed the consolidation way to tackle long-term lower oil prices.
Impact on the industry
This merger, without doubt, has cemented the speculation that larger oil firms are re-adjusting their strategy to lower oil prices, which show no signs of buoying in the near future. And one of the key success strategies, as it’s becoming increasingly clear, is to move towards becoming a one-stop shop for all service and manufacturing needs. GE Oil & Gas is primarily an equipment manufacturer while Baker Hughes is predominantly known for services. This merger has given birth to a ‘full-stream’ service provider. What it means is that it will be a single window for upstream exploration and production, midstream transportation, and downstream refining and marketing.
Another division that this new entity will look to bank on is GE’s big data analytics technology, called Predix. This stellar technology (GE’s exclusive property), will prove to be a game-changer when it will be used extensively by the new company to monitor the performance of the rigs, also to suggest corrective measures from any deviations in performance and to suggest the lifespan of the equipment; based on the performance and output. This will give a clear edge over its two biggest rivals, Schlumberger and Halliburton, who rely heavily on third-party vendors for all their forecasting and analytical needs.
Read why collaboration is what the oil and gas industry needs right now
Shareholders rejoice but woes for employees
GE, it seems, had a party in mind when they merged with Baker Hughes. Despite a company-wide revenue crash of nearly 40 per cent in 2016, Baker Hughes shareholders popped open champagnes as GE, at the time of the merger, announced a one-time dividend pay-out of USD 17.5 per share! Although even with such a whopper pay-out GE could not plug in the shareholders’ skepticism around the longevity of this merger as the announcement saw another slip of 6 per cent of the company’s share price.
Furthermore, even with vastly different natures of business GE and Baker Hughes do have overlapping business units and operational costs, which will have to be pruned for better output and return on investment. Lorenzo Simonelli, CEO of the newly formed BHGE, when asked about possible layoffs, stated in an interview with Chron.com, “Will there be a people impact? Yes. As you look at some of the other areas, from an enabling perspective, as you look at trying to drive productivity. But our focus is really on that combination being complementary.” To break this ambiguous reply down, it means that yes there could be possibly thousands of employees of the newly formed BHGE being displaced.
Changes and impact on supply chain
As mentioned above, Baker Hughes GE merger has created a one-of-a-kind ‘full-stream’ provider in the energy industry, thus grabbing a lion’s share of the market. It gives them a unique leverage when competing with the other two big names in the industry. For example, Artificial Lift segment earlier saw a market share of 18 per cent by Baker Hughes and 11 per cent by GE. But post this merger, BHGE commands a respectable 30 per cent of the segment. This undeniably gives it a stronger stance to charge lower prices for its services, as redundant and duplicate costs will come down. It can compete aggressively by offering lower rates than the competition, giving volume discounts, clocking shorter lead times, offering bundled deals on the entire gamut of equipment and services, decreased administrative costs, etc. This will build up a humongous pressure on Schlumberger and Halliburton to re-engineer their supply chain to be able to take BHGE head-on; especially because the BHGE now has in-house expertise under its wing.
M&A: the way forward for the industry
Since the plummet of oil prices of 2014, larger companies have looked at acquiring smaller ones in order to sustain their production even at lower price tag per barrel. Pipeline operators American Midstream Partners bought JP Energy Partners and refiners like HollyFrontier Corp agreed to buy a Suncor Inc. division in late 2016. Baker Hughes and GE have small (less than 10 per cent) market share in several energy sector segments. Even if each of these segments is seeing a bigger market share being enjoyed by another firm, there are several smaller firms, which are reeling under financial stress and would make for great takeover targets. Some of these firms are spread over various segments and thus acquiring them will make a lot of sense for a firm looking to have an umbrella presence in various energy-related segments which is the power of a merger and acquisition, it guarantees growth of not only the company but the whole sector.
But how can we achieve the envisioned growth? It can be done when companies across the world come on a single platform and we’re doing that. Energy Dais helps you find the next big opportunity for your company, you get a verified database for creating an alliance for a major project you are executing and enhance your global presence.
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