‘Quite abit of drama’
With GE merger, Baker Hughes CEO shifts company from an also-ran to going for No. 1
“We started to really gain a better appreciation for how complementary our two portfolios were.” Martin Craighead, Baker Hughes CEO
Martin Craighead acknowledged it was a “tough realization to grasp.” Under the threat of a hostile takeover — “coercive tactics” as Craighead first put it — he agreed to sell the company for $35 billion to its fiercest adversary, Halliburton.
Craighead, the Baker Hughes CEO, would walk away with $29 million, but the company for which he worked for 30 years would be subsumed, and the name Baker Hughes — the company of Howard Hughes Sr. — would disappear. But given the difficult antitrust issues that were ahead, Craighead wasn’t convinced the deal would close; he negotiated a $3.5 billion breakup fee, 10 percent of the value of the deal, or double the industry standard.
Two years later, Baker Hughes has pocketed that money, and Craighead has managed to guide the company through one of the most tumultuous periods in its 108-year history to poten- tially emerge as a bigger, stronger firm that may finally eclipse its Houston rival. Last week, Baker Hughes agreed to a $32 billion merger with General Electric’s Oil & Gas division, a deal to create a new Baker Hughes that would surpass Halliburton as the world’s secondlargest energy services provider and challenge industry leader Schlumberger.
“Baker Hughes got $3.5 billion from their biggest competitor and then leapfrogged that company by combining with the biggest industrial player in North America. He has delivered the most successful playbook we’ve seen in the downturn,” Matthew Marietta, an analyst at investment group Stephens, said of Craighead.
The GE merger, which would keep Craighead in the company as vice chairman of board, appears a career capstone that will rewrite the legacy of Craighead’s tenure at Baker Hughes. Since Craighead became CEO in 2012, the company’s performance largely disappointed as it lost focus on its core technology business and faded to a distant No. 3 in the industry.
The failed Halliburton deal, abandoned because of strong objections by antitrust regulators, left the company further diminished. Hamstrung by the
merger agreement, Baker Hughes was unable to take actions, such as selling underperforming assets, that might have helped it better weather the worst energy downturn in 30 years.
Despite Halliburton’s $3.5 billion payment, Baker Hughes still lost nearly $1 billion in the second quarter of the year and slashed 5,000 jobs; in the third quarter it lost more than $400 million and laid off another 2,000 workers. Craighead, meanwhile, narrowed the company’s focus to technology and niche businesses where it might still compete with Schlumberger and Halliburton.
The GE merger, of course, changed all that. Because the companies have few overlapping businesses, most analysts expect the deal to avoid the antitrust objections that sank the Halliburton deal.
In addition, the lack of overlapping businesses will likely mean fewer layoffs if the deal closes, as expected, in mid-2017. Craighead emphasized that during a town hall meeting with employees last week, telling them that the “gutwrenching” mass layoffs of past two years were largely over as the energy industry begins a tentative recovery.
“I am one that really doesn’t like drama, but for the last couple of years, there has been quite a bit of drama,” Craighead said. “But let me tell you, this is a whole different set of circumstances from the one previously.”
Thanks, Halliburton
The origins of the Baker Hughes and GE marriage began when Baker was still betrothed to Halliburton.
GE Oil & Gas emerged as the likeliest buyer of $7.5 billion worth of Baker Hughes’ businesses that Halliburton offered to divest to gain the approval of deal. As a result, Halliburton opened the books on Baker Hughes, giving GE a thorough and detailed look into the company.
Lorenzo Simonelli, chief executive of GE Oil & Gas, acknowledged that these careful evaluations helped him see the possibilities of a partnership with Baker Hughes. He reached out to Craighead soon after the Halliburton deal collapsed, said Simonelli, slated to become CEO of the merged company.
“GE was able to come into the room and rip apart the onion and sort of look at everything,” said Marietta, the analyst. “This merger probably doesn’t happen without Halliburton.”
Emily Mir, a spokeswoman for Halliburton, said mergers and acquisitions are to be expected as companies look to grow. But, she added: “The proposed transaction may change the names of the competitors or who is in charge. It will not change our demonstrated track record of having a successful strategy, core values or the unique way we go to market.”
The GE deal started with discussions of potential joint ventures in areas such as sensor technolo- gies, predictive software and data analytics. Then, in late September after a series of meetings in New York, Craighead spent two days doing a “deep dive” into GE Oil & Gas, studying product lines, global locations, employment, and support from the broader GE research and development operation. He determined the talent and cultures of two companies known for technology and innovation — think the electric light and roller cone drill bit — would mesh well.
That was the tipping point, Craighead said. “We started to really gain a better appreciation for how complementary our two portfolios were.”
Byron Pope, an energy analyst at Houston investment bank Tudor, Pickering, Holt & Co., said the deal appears to be a win for Craighead, one that would allow the company, which was retrenching, to expand its ambitions. For example, Baker Hughes aimed to sell more products and equipment internationally, and GE, with a footprint in 120 countries, could provide the launching pad.
Pope described Craighead, 56, as the “protector of the Baker Hughes brand and culture.” Craighead joined Baker Hughes in 1986, after working four years as an engineer with Houstonbased BJ Services Co., which evolved to specialize in hydraulic fracturing, or fracking.
Shortly before Craighead was named CEO, Baker Hughes acquired BJ Services to compete with Halliburton and Schlumberger in the booming fracking business. But Baker Hughes was unable to compete with its larger rivals, especially Halliburton. The acquisition became a drag on earnings; Baker Hughes now plans to sell a large chunk of the fracking business.
“That is one of the worst blunders the company ever engaged in,” said Bill Herbert, senior energy analyst at the investment research firm Piper Jaffray & Co. “It’s been an albatross across Baker’s neck.”
But Baker Hughes even struggled in its bread-and-butter drill bits business, said Richard Spears, director of the Spears & Associates consulting firm. Howard Hughes Sr. developed the Sharp-Hughes rock bit back in 1908.
“For decades going back to Howard Hughes Sr., Baker Hughes was the No. 1 drill bit company in the world — until 2010,” Spears said.
Baker Hughes’ drill bit market share fell from 26 percent to 19 percent, Spears said. That’s largely because the industry shifted from drill bits with multiple moving parts that Baker Hughes revolutionized to one-piece diamond bits that are easier for competitors to replicate.
“Schlumberger took advantage of that and just outsold them,” Spears said.
A better legacy?
Then came the energy bust and the Halliburton deal, which left Baker Hughes weakened and Craighead with an uncertain legacy, analysts said. But since the breakup, they added, Craighead and Baker Hughes have made the right moves, cutting costs, improving profit margins and refocusing on the company’s strength in technology. And that was before the GE deal.
That deal is expected to reshape energy services, creating another strong competitor in an industry that was increasingly dominated by the so-called big two, Schlumberger and Halliburton.
As one Baker Hughes employee noted during last week’s town hall, the company has long been the third largest in the industry.
“Well, I don’t like being No. 3,” he said, “and many of us don’t.”
Craighead and Simonelli don’t either. Once the deal closes, the new Baker Hughes will likely be No. 2. Then, they said, it will gun for the top spot.