WithOilDeal,GECEOImmeltRevampsHisStrategy

wsj.com/articles/withoilspinoffgeceoimmeltrevampshisstrategy1477926808

10/31/2016
ENLARGE
GeneralElectricCEOJeffImmeltspeaksduringanewsconference.Mr.ImmeltsaidthepurchaseofBakerHughes
willhelpGEweatheraslumpintheenergyindustry.Photo:StevenSenne/AssociatedPress
By
UpdatedOct.31,20161:28p.m.ET
JeffImmelt,thechairmanandchiefexecutiveofGeneralElectricCo.,saidthepurchaseofBakerHughesInc.willhelp
theindustrialgiantbulkupandweatheraprolongedslumpintheenergyindustry.
Butthecomplextransaction,whichwillcarveoutGEsoilandgasbusinessintoaseparatepubliclytradedcompany,
alsoraisesquestionsabouthowfarMr.Immeltwillgoinslimmingdownitsoncesprawlingcorporateportfolio.GEsoil
andgasbusinessaccountedforabout14%ofGEsrevenuelastyear.
InaninterviewMonday,Mr.ImmeltdismissedtheideathathewasshrinkingGEsindustrialreach.Ilookatthisasa
strengthening,notaseparation,saidMr.Immelt,whowillserveaschairmanofthenewlyformedcompany.Ithinkthis
isauniquetransaction,butnotonethatnecessarilyneedstobeappliedelsewhere.
Mr.Immelt,whohassteeredGEfor15years,hasspentthepastfewyearsrevampingthe124yearoldconglomerate.
Afterthefinancialcrisis,hesoldoffmuchofGEsmassivefinancearm,whichoncehadmorethan$600billionin
assetsandgeneratedasmuchashalfofGEsannualprofit.Healsospentmorethan$14billionsince2007on
acquisitionsbuildingupitsenergybusinessandlastyearpaid$10billiontobuyAlstomSAspowerplantbusiness.
SeparatingGEsoilandgasbusinesswouldleavebehindasmallerindustrialplayerwitharound$100billioninannual
revenuethatislargelyfocusedonfourbusinesses:jetengines,powerturbines,medicalscannersandlocomotives.
Alongsidethetransaction,GEsaiditwouldsellitsGEWaterbusiness,whichmakeswatertreatmentandprocessing
systems.
GeneralElectricwillowntwothirdsofthenewlyformedBakerHughes,controlitsleadershipandincludeitsresultsin
GEsfinancialreports.GEOil&GaschiefLorenzoSimonelliwillserveasCEOofthecombinedcompany,whichwill
haveabout70,000workersandmorethan$30billioninannualrevenue.GEwillselectfiveoftheninedirectors.
TheBakerHughesacquisitionwasachancetocompletethebusinessstrategically,Mr.Immelttoldinvestorsona
conferencecallMonday.GEexecutivessaidtheyexpectedaslowrecoveryinenergyprices,withcrudeprices
expectedtobe$45to$60abarrelthrough2019.
GEsstrategyintheoilbusinesswasntabouttimingpricespikesincrude,Mr.Immeltadded,butaboutdeveloping
advancedequipmentforanindustrythatwasgoingtobecomemoretechnicallysophisticatedastimewenton.
Thatswhatwevebeenbettingonallalong,Mr.Immeltsaid.SoIthinkwhenthisopportunitycameup,itjustmade
allkindsofsenseforinvestorsofbothcompaniesandourcustomerstograbit.
Mr.Immeltsmovecomesaftertwoyearsofstruggleintheoilunit,whichsawsalesandprofitsplummetaftertheprice
ofcrudeoilcollapsed.GEisinthemidstofcuttingmorethan$1billionincostsoutofitsoilbusiness,and
acknowledgedtoinvestorsonitsthirdquarterearningscallthatitwouldeventuallyrunoutofroomformorecost
savings.

CombiningwithBakerHugheswillgiveexecutivesalargenewtargetforcostcutting,andGEsaidMondaythatithas
alreadytargeted$1.2billionincostcutsthrough2020atthecombinedcompany.
Thenewcompanywillbefarmoreresilientandcycleresistant,BakerHughesCEOMartinCraigheadsaidMonday
ontheconferencecallforinvestors.
GEshareholders,includingTrianFundManagementLP,welcomedthetransaction.SharesofGErose11cents,or
0.4%inafternoontrading,whileBakerHughesslipped5.8%to$55.70.
Trianbelievesthecombinationhasstrongindustriallogic,saidaspokeswomanforTrian,whichtookastakeinGE
lastyear.TrianalsoapplaudsGEforstructuringanattractivetransactionthatshouldcrystallizeasuperiorvaluation
multipleforGEsOilandGasassets.
Aspartofthetransaction,GEwillpay$7.4billiontofundaspecialdividendforBakerHughesshareholders.Those
fundswillcomefromroughly$20billionofleverageGEplanstoaddtoitsbalancesheet,andwhichsomeinvestors
havehopedtoseedevotedtobuyingbackthecompanysshares.
GEandBakerHughesexecutivessaidthestructureofthetransactionwouldprovideGEandthemergedcompany
with$800millionto$1billionintaxbenefitsovertime,largelyderivedfromexistingbenefitsatBakerHughesthatit
wasunabletotakeadvantageof.ThemergedcompanywillhaveheadquartersinLondonandHouston.
ThemergerwillprovidedistanceforGEfromthesluggishrecoveryoftheoilbusiness,which,despiteglimmersof
hopeinrecentquarters,hasweighedheavilyonthecompanysreturns.WithitscontrollingstakeinthenewBaker
Hughes,GEwillbepositionedtoreaptherewardsiftheoilandgasbusinessrebounds,thecompanysaid.
Still,itwasntclearhowlongGEwillholdontoitsinterestintheunit,oneofthelargestacquisitionprojectsofMr.
Immeltstenureandthecompanyraisedthepossibilitythatitcouldspinofftheinvestmentinthefuture.The
structureasyouseeittodaydoesnotprecludedoingaspinorsplitinthefutureonataxfreebasis,GEfinancechief
JeffreyBornsteinsaidonMondaysinvestorcall.
ThedealispositivestrategicallyforGEshareholders,saidStevenWinoker,ananalystatSanfordBernstein&Co.,in
anotetoinvestors.ThisBakerdealisalsoanattractivestructureforGE:withoutrequiringafullcashoutlayforBaker
Hughes,theNewBakerprovidesGEshareholderswithadditionalupsidetoanoilpricerecovery,hewrote.
BillHerbert,ananalystatSimmons,saidthetransactionwillputnewpressureonBakerHughesrivalsSchlumberger
Ltd.andHalliburtonCo.ThecombinedGEBakerHugheswillbeatminimumaconsiderablecompetitivenuisance
withregardtobiddingonbigprojects,hesaid.
Mr.HerbertcalledthedealalifelinetoBakerHughes,buthesaidthenewpartnershipwithGEmayworryBaker
Hughesshareholdersbecauseitleavesthecompanymoreleveragedtodeepwaterandinternationalprojects,which
aren'tasflexibleastheU.S.onshorebusiness.
Mr.Simonelli,whowillrunthecombinedcompany,saidthemergedcompanywouldhaveamorediverseportfolioand
betterabilitytoweatherdownturnsinnichesoftheoilindustry,likesubseaproduction.Wereactuallycreatinga
strongerbusiness,Mr.Simonellisaid.
GEexecutivessaidtheyareconfidentthecombinationwillpassmusterwithregulators,whoobjectedtoHalliburtons
attempttoacquireBakerHughesonanticompetitivegrounds.GEislargelyasellerofoilandgasequipment,while
BakerHughesspecializesinoilfieldservices.
ErinAilworthcontributedtothisarticle.
WritetoTedMannatted.mann@wsj.com