How Much Synergies Will The Baker Hughes-GE Deal Generate?

by Trefis Team
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BHI
Baker Hughes Incorporated
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Earlier this month, General Electric Company (NYSE:GE) announced its plans to merge its oil and gas operations with that of Baker Hughes‘ (NYSE:BHI) existing operations to form an industry leading oilfield technology provider with a unique mix of service and equipment capabilities [1]. Given GE’s technological expertise and Baker Hughes’ oilfield services’ capabilities, the “New” Baker Hughes will be equipped to provide best-in-class physical and digital technology solutions to its customers. As part of the deal, Baker Hughes shareholders will receive a special one-time cash dividend of $17.50 per share, or a total sum of $7.4 billion, post the completion of the deal. Also, these shareholders will own 37.5% of the new company, while the remaining 62.5% will be held by GE shareholders.

GE-Baker Hughes Deal Structure

BHI-GE-merger

Since the two companies have complementary businesses, the deal is likely to bring about significant revenue as well as cost synergies. According to the initial estimates by the companies, the transaction will result in cost synergies of $1.2 billion and revenue synergies of $0.4 billion by 2020. However, the transaction is expected to close in mid 2017, which implies that these synergies would start flowing from 2018 onward. Accordingly, below we calculate the present value of the revenue and cost synergies from the deal, assuming a weighted average cost of capital (WACC) of 8.6%.

BHI-Q&A-3Q16-merger

BHI-Q&A-3Q16-merger-1

Have more questions about Baker Hughes (NYSE:BHI)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Baker Hughes

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Notes:
  1. GE and Baker Hughes Agree To Create New Fullstream Digital Industrial Services Company, 31st October 2016, www.bakerhughes.com []
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