Introduction
Due to increased focus on non-conventional energy sources (viz Solar, Hydro, Nuclear, Geothermal and Wind), our demand for oil is decreasing. Therefore, the OPEC (Organization of the Petroleum Exporting Countries) should slow down the extraction and production. But they do not plan to slow down the process anytime soon. They have excess capacity. And that is why the price of crude oil has fallen to $46.46/ barrel (as on 14th July 2017). The production costs have become nearly equal to the price of the oil. The margins of US and European countries have become wafer thin and they are barely breaking even. In order to compete with the OPEC, US based GE (Oil & Gas) and Europe based Baker Hughes have decided to merge.
The Merger
General Electric completed its buyout of Baker Hughes Inc, merging it with its own oil and gas equipment and services operations to create the world's second-largest oilfield service provider by revenue. GE will hold 62.5% of the new company and the remaining 37.5% will be held by shareholders.
Advantages of the Merger:
- GE Oil & Gas is the leader in oil extraction equipment manufacturing (upstream operations). While Baker Hughes is the leader in consulting and services related to oil extraction, (downstream operations). Therefore, this is a complementary merger. Both the companies fit together perfectly like the pieces of a puzzle. It will be easy to achieve strategic fit.
- The combined entity will have access to both European as well as American Markets, thus expanding market presence.
- The GE- Baker deal might also move the sector towards embracing Big Data in production optimisation.