Shares in General Electric Company (NYSE:GE) moved a couple percent higher on news that it could potentially acquire Baker Hughes Incorporated (NYSE:BHI). That suggests the market likes the idea, but anyone holding GE stock needs to slow down.
The possibility that mega-cap GE might buy Baker Hughes created a lot of chatter on Wall Street, to say nothing of the oil patch. And it’s not out of left field. The Justice Department stymied Halliburton Company’s (NYSE:HAL) proposed acquisition earlier this year. BHI held talks with GE over the possibility of buying some assets to gain regulatory approval.
Lastly, oil prices have been so low for so long that it was only a matter of time before we saw further consolidation in the industry.
Baker Hughes is looking for a partner to shore it up amid a deep cyclical slump in oil prices. Regulators aside, it shouldn’t be too hard hard to find one. BHI is a giant, but it’s not among the very biggest names in oil field services. With a market cap of less than $25 billion, there’s more than one potential suitor who could afford such a deal.
Shares in BHI spiked as much as 6.5% soon after the opening bell. GE stock climbed as much as 2%. It’s not unusual for the shares of an acquiring company to decline when a merger appears imminent, so this can be seen as a thumbs-up from the market.
Just don’t bet on it. Here’s a statement from General Electric:
“We are in discussion with Baker Hughes on potential partnerships. While nothing is concluded, none of these options include an outright purchase.”
It didn’t take too long for GE to pop the Street’s bubble, so you can put your giddiness away.
Is GE Ditching Oil and Gas?
It doesn’t appear that the market believes the denial — not given the way GE stock and BHI stock are trading. Or perhaps investors just love the idea of a partnership. Fair enough. It’s probably a good idea.
Baker Hughes stock is down 10% since the last time it peaked 18 months ago, but it’s on the right trend. BHI is at $57, far better than a 52-week low of less than $40. It wouldn’t be selling at the bottom of the market. Indeed, it’s now up about 25% for the year-to-date. A handsome premium on top of that recovery in the share price looks like it suits investors just fine.
If it happens, which GE says it won’t.
As for General Electric, investors like the idea that it could put BHI together with its own struggling energy division. The company has made no secret of the fact that it wants out. It’s pursuing a long-term strategy of getting leaner and meaner by jettisoning parts of the business that drag on results, most notably GE Financial. A projected 30% decline in oil-and-gas operating profit this year makes the division an obvious candidate.
Regardless of the way this goes, the thesis on GE stock doesn’t appear to change much.
The long-term strategy is sound. Stripping away the weakest parts of the conglomerate just make sense. There’s a reason why it’s so fashionable these days.
Farther out, General Electric’s investments in software, 3D technologies and other next-gen industrial businesses should pay off eventually. It wants to be a top 10 software company in a few years. That’s where the growth and margins are. Anything weighing on the bottom line might as well go.
Whether GE gets rid of oil-and-gas later rather than sooner, shares look like they offer decent value at current levels. It has a forward price-to-earnings multiple on an expected compound annual growth rate of 12%. And then there’s GE’s dividend, which now yields 3.19%.
As a long-term equity income play, there’s nothing to worry about no matter how this one breaks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
