Baker Hughes, Western Atlas agree to merge

Baker Hughes Inc., Houston, has made a $5.5 billion offer to merge with Western Atlas Inc., also of Houston, to create the third largest oil field services firm.

The new firm, to retain the Baker Hughes name, will offer "fully integrated reservoir management, from exploration through production," said Baker Hughes. Only Schlumberger and the Dresser-Halliburton combine will be larger among petroleum service companies.

Under terms of the agreement, which has been approved by both companies' boards, holders of Western Atlas common stock will receive 2.4 shares of newly issued Baker Hughes common stock for each of their shares. The trade ratio is subject to adjustment, depending on stock performance.

Baker Hughes has about 170 million outstanding shares. Based on recent stock prices, Baker Hughes would issue an additional 131 million shares to Western Atlas shareholders. As a result, Baker Hughes would have about 301 million shares outstanding after the merger, about 56% of which would be owned by Baker Hughes stockholders and 44% by Western Atlas stockholders.

As part of the deal, Baker Hughes will assume about $1.18 billion in Western Atlas's debt. The transaction is expected to be accounted for on a pooling-of-interests basis and to be tax-free to Western Atlas stockholders.

The combined company would have 1998 revenues of about $6.5 billion and 36,000 employees. If the merger is approved, the new firm's headquarters will be in Houston.

Max L. Lukens, chairman, president, and CEO of Baker Hughes, will be chairman and CEO of the combined company. John R. Russell, president and CEO of Western Atlas, will be president of the combined company.

Strategy

Lukens described recent industry trends that led his company to make this deal: "The oil and gas industry continues to increase its use of integrated services that provide comprehensive solutions for reservoir management. Baker Hughes responded early to this trend, and our stated vision has been to add technologies and services that offer complete reservoir management over the life of the field.

"The addition of Western Atlas' seismic, wireline logging, and E&P services activities positions us as an enhanced integrated partner for our customers."

Western Atlas Chairman Alton J. Brann said, "Over the past few years, we have invested heavily and moved Western Atlas into a leading role in seismic, well logging, and integrated reservoir information solutions. We have also expanded the application of our oil field information technologies from exploration and development into the production phase of the business.

"Weellipseappreciate the additional advantages we can achieve by integrating with the other services required to offer a complete solution."

Lukens expects the merger to be modestly dilutive to earnings in the first year of operation and significantly accretive to cash flow. In the second year and beyond, it should be accretive to earnings. He also says the merger will save about $135 million during the first year.

Baker Hughes expects to complete the transaction in the third quarter. Any one-time charges related to the transaction should be recognized before the end of Baker Hughes's current fiscal year.

Reaction

Moody's Investors Service views the pending merger as positive. The service has placed its ratings of both firms under review for a possible upgrade.

"Moody's review will assess the benefits of Baker Hughes's enhanced market position, including its ability to form long-term strategic alliances with its customers," said Moody's. "Moody's will also evaluate the extent to which the combined company will be able to compete with its larger, more highly rated peers and the degree to which it will be able to withstand reduction in capital spending by oil and gas companies in reaction to a sustained decline in commodity prices.

"Moody's review will also focus on Baker Hughes' growth strategy, the likelihood of future acquisitions, and management's financial policies."

Allen Brooks, oil field services analyst with CIBC Oppenheimer, Houston, also views the combination as strong: "I don't think there is any question that the combination makes a very powerful company, especially to compete for integrated services business and life-of-field projects."

Halliburton counterbid?

Meanwhile, some industry analysts have said they expect the merger agreement to provoke a counteroffer from Halliburton Co., Dallas. Although Brooks says he has no knowledge of such a plan, he added, "There is a chance that that will happen."

Because Western Atlas is No. 1 in seismic and No. 2 in wireline services, it offers a potential to either firm that makes the possibility of Halliburton making an alternative proposal "realistic," says Brooks.

Halliburton also would be a good match for Western Atlas, he says. "They have a similar scope of coverage of the exploration and development process.

"If Western Atlas were a part of Halliburton, Halliburton would wind up going further into the development process than Baker Hughes. But, as far as exploration, well construction, and development work are concerned, both Baker and Halliburton would be enhanced by having Western Atlas as component of their businesses."

Brooks does not believe that Halliburton's merger with Dresser Industries Inc. will hinder it from making a bid for Western Atlas, if that is what it has in mind: "I don't know that that is going to be an impediment."