General Electric Company’s (NYSE:GE) deal for Baker Hughes Incorporated (NYSE:BHI) has won antitrust approval. GE stock holders have gone all-in on higher oil prices.
That’s not much to celebrate on a day where oil is getting pounded. Wednesday saw a slew of negative oil data slam energy prices — and BHI stock, for that matter — into the ground. Still, one day doesn’t make or break the case.
The complex merger, resulting in an entity of which General Electric will own 62.5%, will see the combined company provide products and services across the oilpatch, from exploration to transport to refining.
It may be the decade’s greatest irony that former General Electric CEO Jeff Immelt, who sold GE as a leader in renewable energy and was just replaced by John Flannery, made his last throw of the corporate dice a bet that oil prices can still rise.
He ended his career as the butt of a Randy Newman song.
Skeptics abound. Our James Brumley wrote recently that the vaunted GE dividend — now yielding a fat 3.44% thanks to the fall in the stock price below $28 per share — is under serious threat. And if you can’t buy GE stock for yield, why buy it at all?
Can Boston Change Houston?
Immelt bet that a mix of heavy equipment and real-time analytics can change Houston’s corporate culture, in which an “integrated” oil company like Exxon Mobil Corporation (NYSE:XOM) is seen as a dinosaur, making the whole of both Baker Hughes and GE worth more than the sum of its parts.
They even made a music video about it.
The two companies say the merger will save $400 million in back-office costs — seat cushion money for an outfit that had almost $10 billion in revenue last year, and is not on track to better that figure this year.
GE Oil and Gas head Lorenzo Simonelli will get the task of making this work, with 70,000 people in 120 countries, 32,000 from Baker Hughes and 37,000 from GE. If he can make it work, and get a tailwind from oil prices GE thinks can reach $60 per barrel in 2019, he could become a big oil player himself as the company is spun off.
Waiting for the Punch
Immelt spent his 15-year reign at General Electric selling or spinning-off its financial and entertainment units to double down on manufacturing.
This, in an era where new media has become a financial master and manufacturing efficiency has destroyed its own employment base.
Along the way, he delivered some solid spinoffs. Synchrony Financial (NYSE:SYF) is now worth 23% more than when it went public in 2014 despite a precipitous fall this year. There are also stakes in Comcast Corporation (NASDAQ:CMCSA) that came from its slow-motion acquisition of NBC-Universal.
Immelt spent most of his time, in short, selling prime GE assets. Those who picked up those assets, or who put their own assets into the acquirers, have done well. General Electric itself, meanwhile, has evolved into an income play. But GE stock is worth about 40% less than when Immelt took office in 2001. The S&P 500 has doubled in that time.
If you are holding GE stock today, you are betting that the company can transform the Houston oil industry with efficiency while at the same time seeing energy prices rise at least 20% from where they are now.
Immelt, who was condemned for joining a business council under former President Barack Obama, bet your investment that President Donald Trump can join U.S. shale drillers with the OPEC cartel, and Russia to squeeze energy buyers at the same time he’s increasing the efficiency of the whole enterprise.
That is a bet that is contradictory on its face. But that was Immelt in a nutshell — big plans that pay off for everyone but General Electric.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
