The oilfield services giant Schlumberger Ltd. (SLB) has acquired lesser rival Smith International Inc. (SII) for approximately $11 billion in an all-stock deal, which is the biggest acquisition in the United States so far this year.
 
The Wall Street Journal had reported on Friday that Schlumberger was in advanced talks to buy Smith. Following this news, Smith’s shares jumped 13% but Schlumberger’s shares fell 2.9%.
 
As the economy has shown signs of recovery and oil prices have seen an uptrend, industry giants want to acquire smaller rivals to increase their business. While the Schlumberger−Smith deal is in the oilfield space, last December’s ExxonMobil−XTO (XOM) deal was in the integrated space.
 
We view the transaction a win-win for the shareholders of both companies, as they would get a more diversified oilfield services exposure. Given that both companies cover the same geographical regions, Smith is a good strategic fit for Schlumberger.
 
Following the completion of this transaction, Schlumberger will rule the oilfield services industry with the merged company’s revenue (nearly $30.9 billion in 2009, comprising Schlumberger’s $22.7 billion and Smith’s $8.2 billion) will be more than double that of its nearest rival Halliburton Company’s (HAL) $14.7 billion.
 
With an increasing global energy demand, producers need to have drilling equipment and advanced technology to cope with drilling in increasingly difficult environments. In addition to Schlumberger’s product lines, customers of the merged company will be able to drill more economically in a challenging environment through Smith’s drilling fluids, drill bits and accelerated technology development.
 
The players are not new to each other as they have already collaborated on a project called M-I SWACO, a 60-40 joint venture, which provides drilling and completion fluid as well as engineering and technical services to the oil and gas industry. Schlumberger said it would realize a pretax savings of about $160 million in 2011 and $320 million in 2012, after subtracting the costs of absorbing Smith’s operations.
 
Under the terms of the agreement, Smith shareholders will receive 0.6966 Schlumberger share in exchange for each Smith share. Based on closing prices for both companies on February 18, 2010, the deal places a value of $45.84 per each Smith share, representing a 37.5% premium. The deal is expected to be completed in the latter half of this year.

 

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