Schlumberger Bulks Up With an $11 Billion Deal for Smith International

Dealmaking in the energy sector has been red-hot lately, with transactions like Exxon's (XOM) $41 billion purchase of XTO (XTO) and the $12 billion restructuring of various properties of Williams Cos. (WMB). Now, Schlumberger (SLB) is getting into the game. It has agreed to pay $11 billion in an all-stock purchase of Smith International (SII). The deal is expected to close in the second half, but it could hit serious challenges along the way.Founded more than 80 years ago, Schlumberger now has 79,000 employees in 80 countries. It has two main business segments. Schlumberger Oilfield Services provides products and services -- such as consulting and software -- for oil formation evaluation, well cementing and directional drilling. WesternGeco helps with reservoir imaging, monitoring and development services. It has the world's largest multiclient seismic library.

4D Modeling

Smith International, on the other hand, has roughly 20,000 employees and gets two-thirds of its revenues from outside the U.S. The company develops oilfield drill bits, which often rely on cutting-edge technologies. For example, the i-DRILL uses 4D modeling to predict drill performance and accuracy, which is important as it gets tougher to extract shale gas and oil found in deep waters.

Smith also has a drilling-fluids business -- called M-I Swaco -- which is actually co-owned by Schlumberger (since 1999). So, both companies have a good track record of working together.

However, Smith's drill-bit business is the main attraction for Schlumberger, which doesn't have a presence in that market. By adding one, Schlumberger would have a more integrated offering, which is a big selling point for state-run oil companies that are looking for seamless infrastructures.

Of course, the deal would also result in cost savings. The projection is for $160 million next year and $320 million in 2012, which should mean a positive impact on earnings.

Antitrust Problems?


The key players in the oil services market -- Schlumberger, Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) -- control roughly 75% of the global business. Because of this concentration, Schlumberger's Smith deal will get intense scrutiny, even though there's little overlap between the two businesses.

Why? By adding Smith, Schlumberger will certainly boost its market power because of its improved breadth of offerings. Moreover, it appears that the Obama administration wants to get more aggressive with antitrust issues. Keep in mind that there has yet to be regulatory approval of the $5.5 billion deal between Baker Hughes and BJ Services (BJ), which was announced in August. And, yes, these companies have little overlap as well.

To deal with the challenge, Schlumberger is likely to offload assets. Some areas include directional drilling and the Smith distribution business.

But when it comes to regulatory matters -- especially with a new leader in the White House -- things can get dicey. And by blocking the Baker Hughes-BJ Services deal or a transaction between Schlumberger and Smith, the Obama administration would be sending a strong signal that it's taking a tougher stance on antitrust.

Tom Taulli advises on
business tax preparation and is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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