Challenges ahead at Baker Hughes
After merger, CEO tasked with joining oil field services firm with GE.
LORENZO Simonelli holds citizenship from Italy, Switzerland and the United Kingdom. Now he’s moving to Houston to lead a company with pedigree that is just as diverse.
Simonelli is the chief executive of the new Baker Hughes, a GE company, created less than a week ago by a merger of the company of Howard Hughes Sr. and the oil drilling pioneer R.C. Baker, with the oil and gas division of the conglomerate founded by Thomas Edison. He now faces the task of integrating two companies with different cultures and different strengths while squeezing out $1.6 billion in savings and leading the world’s second-largest energy services company into a fiercely competitive market where oil company clients are demanding lower costs, greater efficiencies and higher production.
Simonelli sees the new Baker Hughes selling services across the energy industry, from wellhead to refinery to power plants. But that future, he said, will grow from the foundations of innovation, risktaking and execution built by Edison, Hughes and Baker.
“These are three iconic names in the industrialization of the United States of America, and you’ve just brought them together,” Simonelli said. “People are excited.”
Simonelli, perhaps like the new company itself, brings an unusual blend of youth and experience to his job. At 43, he has been a top executive at GE for nearly a decade, becoming the company’s youngest division CEO ever at age 34. He also was one of four finalists to succeed retiring chief executive Jeff Immelt — a job that went to GE Healthcare chief John Flannery, nearly 12 years his senior.
Simonelli’s consolation prize
was running the $23 billion Baker Hughes, of which GE controls more than 62 percent. Simonelli, who is single, is house hunting inside the Loop. He’s also looking for good Italian restaurants. From olive to crude oil
Simonelli’s Italian roots reach to his family’s vineyard and estate in Tuscany, where his relatives produce and sell wine and olive oil. His father, Leonardo, however, broke from the family’s agricultural traditions to pursue a career as a European banker, taking Simonelli to London when he was 9.
It was through his father’s Italian and London business connections that Simonelli found his way to General Electric. One of his father’s friends, former GE Vice Chairman Paolo Fresco, led him to training programs at GE.
From there, it didn’t take Simonelli long to get on the fast track for global assignments from Cleveland to Budapest.
“I’ve been fortunate in being at places at the right time, and also taking good advice,” Simonelli said.
By pure coincidence — although Simonelli jokes it was his master plan — General Electric entered the energy sector the same year Simonelli joined the company in 1994. GE acquired the equipment maker Nuovo Pignone and set up the GE Oil & Gas headquarters in Florence, near Simonelli’s hometown, helping to persuade him to switch his aspirations from finance to manufacturing, energy and power.
“I always wanted to create something,” Simonelli said, tracing that desire to his wine and olive oil making heritage. “There’s something visible you can point to that you’re delivering to others.”
His passion now, he said, is running a business, in this case one with nearly 70,000 employees in 120 countries. With the merger, Baker Hughes, once a distant No. 3, surpassed archrival and one-time merger partner Halliburton in employment and revenues and now only trails industry leader Schlumberger. The new Baker Hughes
GE and the old Baker Hughes negotiated a merger that kept the Baker Hughes name (with the addition, “a GE company”) and ensured relative independence by keeping it as a separately traded company, rather than swallowing it as a GE division. Former Baker Hughes CEO Martin Craighead remains at the company as vice chairman.
The goal is to combine Baker Hughes’ deep knowledge of the oil patch and expertise in drill bits and other tools with GE’s global scale, strengths in deep-water equipment and leadership in technology to collect and to analyze massive amounts of data from industrial operations.
Jim Wicklund, an analyst at Credit Suisse in Dallas, said the new Baker Hughes will face inevitable growing pains and lose some entrepreneurially minded employees worried about contending with more bureaucratic layers. GE values its tried-and-true structure of subsidiaries answering to the parent company.
“Every time GE has made an acquisition, they’ve taken the time to convert management
to the GE way of doing things,” he said.
Doing so is not necessarily a bad thing because GE has made it work for decades, but the time effort and attention it requires could cost the company market share in the next 12 months or so as the company and its employees adjust, Wicklund said. But over the longer term, he added, Baker Hughes’ rebirth as a larger, more technologically advanced business could lead to new markets, higher profits and greater value.
Baker Hughes’ goal is to offer energy companies fully integrated services from drilling to refining to electricity generation — a strategy Simonelli describes as “molecule to the megawatt.” The new Baker Hughes, for instance, can offer everything from wind turbines to oil field equipment, adding big data analytics that can predict equipment failures before they happen to avoid costly shutdowns. A rapid rise
Simonelli emphasizes that GE isn’t swallowing Baker Hughes, which will have dual headquarters in Houston and London, which is the home of GE Oil & Gas. Rather, he said, “It is a blending of the best of both.”
And just as combining different grapes for a quality red wine blend is challenging, there’s delicacy, and even pain, in integrating two major companies into one seamless operation. Simonelli will have to cut jobs and to close many facilities, including in the Houston area, where the company owns or leases about 40 buildings.
Baker Hughes is promising $1.6 billion in overall savings by 2020, but because the operations of Baker Hughes and GE Oil & Gas didn’t overlap much, there won’t be nearly as much meat-cleaver cutting that would have followed a Halliburton takeover, had it not been blocked by federal antitrust officials. Still, Simonelli acknowledged, job cuts are coming to backoffice operations such as accounting and human resources.
Simonelli has made tough decisions before, winning praise and promotions. At 34, he found himself moving to Erie, Pa., to lead the GE Transportation division. He inherited a business with more than 5,000 employees and a $300 million investment in developing the world’s most fuel-efficient and environmentally friendly locomotive.
“If the guy is 35, he has to be a pretty smart guy,” Frank Fusco, president of the Erie plant’s union, told reporters at the time. “GE doesn’t move guys around who aren’t.”
Simonelli grew the division — including opening a Texas plant in Fort Worth — but not without difficulties. During the recession that ended in 2009, he cut 1,500 jobs at the Erie plant, froze executive pay, canceled the company Christmas party and even delayed turning on the heat in some buildings to keep the division above water.
As the economy rebounded, GE Transportation became GE’s fast-growing division, with expansions in Texas, Brazil, China and Turkey. But he faced more tough decisions. After failing to get sufficient concessions from the union in contract negotiations, Simonelli shifted production from Erie to overseas plants and slashed another 1,000 jobs there in 2013. He also moved the headquarters from Erie to Chicago.
These moves led to more growth for the division as the rail industry grew outside a stagnant U.S. market. Changed landscape
Simonelli would face more tough decisions after he took over GE Oil & Gas in 2014. It was a huge vote of confidence for the executive, then just 40, who was taking over a business in which GE had spent $11 billion to make acquisitions such as Houston-based Hydril and Vetco Gray, as well as U.K.-based Wellstream. Simonelli also was succeeding Dan Heintzelman, who had been named GE’s vice chairman. Analysts saw the moves as part of preparations to groom Simonelli as Immelt’s successor.
But then the oil bust hit, sending prices from more than $100 per barrel in 2014 to $26 last year. Just prior to Simonelli’s promotion, GE Oil & Gas had bought Texas’ Lufkin Industries for $3.3 billion in what proved to be an ill-timed investment. Simonelli had to cut 1,000 job over two years. Looking for bargains
Still, Simonelli kept his eye on growth. In early 2016, he spoke of going on the offense during the bust, looking to buy companies at bargain prices, to launch new partnerships and to disrupt an industry undergoing change.
At the time, with Halliburton trying to complete its merger with Baker Hughes, Simonelli looked to buy some Baker Hughes business units that Halliburton planned to sell to appease regulators.
That gave him intimate knowledge of Baker Hughes and, when the Halliburton deal collapsed, he immediately reached out to Craighead, the Baker Hughes CEO.
Those talks ultimately led to the merger that has changed the landscape of the energy services industry.
“I’d say we’ve executed what we said we would do,” Simonelli said. “We are disrupters.”
“If the guy is 35, smarthe has guy.to be GEa pretty doesn’t move guys around who aren’t.” Frank Fusco, president of the Erie plant’s union