Schlumberger Limited (SLB) completed its proposed merger with Smith International Inc. (SII) last Friday. The closure of the deal follows Smith shareholders’ vote in favor of the merger on August 24.
Schlumberger’s superior product line will further be diversified through its offering of Smith’s drilling fluids, drill bits and accelerated technology development. Moreover, Schlumberger’s competition with its rival Halliburton Company (HAL) will also be intensified through this merger.
Total consideration for the merger was nearly $11 billion. As previously announced, Smith shareholders will receive 0.6966 Schlumberger share for each share of Smith. As such, Schlumberger has issued approximately 176 million shares pursuant to the merger, representing 12.9% of its outstanding shares.
As both the companies covered almost the same geographical regions, we believe that Smith is a good strategic fit for Schlumberger. Moreover, the players are not new to each other as they have already collaborated on M-I SWACO, a 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 pre-tax savings of about $160 million in 2011 and $320 million in 2012, after subtracting the cost of absorbing Smith’s operations. This will positively impact Schlumberger’s bottom line.
The acquisition of Smith will no doubt boost Schlumberger’s international position. Its competitors have also been closing the gap in recent years by aggressively expanding in international markets. Apart from Halliburton, Baker Hughes (BHI) will also be a stronger competitor following its acquisition of BJ Services.
While Smith’s product line diversifies Schlumberger’s offerings, we are concerned about the return on capital employed as drill bits require more working capital and drilling fluids are more capital intensive. Consequently, our Neutral recommendation for Schlumberger shares remains unchanged at this stage with the Zacks #3 Rank (Hold).