Schlumberger To Buy Smith International In $11B Deal

Schlumberger Ltd. (SLB) will acquire Smith International (SII) for about $11 billion in an all-stock deal that is the year's largest acquisition and will make Schlumberger by far the world's biggest oilfield services company.

The deal, which the companies announced Sunday, will cement Schlumberger's position atop the oil-services industry, which helps oil producers locate and drill for oil deposits. After the deal, Schlumberger, already the biggest company in the sector by revenue and market value, would have revenues double that of its nearest rival, Halliburton Co. (HAL), although most analysts expect Schlumberger to sell some assets for antitrust or other reasons.

Under the terms of the deal, Smith shareholders will receive 0.6966 Schlumberger share for each Smith share they own--a 37.5% premium over Smith's share price on Thursday, when news of the deal was first reported. The deal, which must still be approved by shareholders of both companies, is expected to close in the second half of this year. Smith shareholders would own about 12.8% of the combined company.

The $11 billion price tag, which values Smith at $44.51 per share based on Friday's close, was higher than most analysts expected. Dan Pickering, an analyst for energy-focused investment bank Tudor Pickering Holt & Co., said some Schlumberger shareholders might also have preferred a cash-and-stock deal to an all-stock deal. But he said the deal makes sense for Schlumberger, which will now be able to package Smith's products with its own services to win more business.

"The deal makes sense operationally," Mr. Pickering said. "It's a bit more than I would have expected from a price perspective."

Markets had a mixed reaction to news of a possible deal on Friday. Smith shares jumped 13%, or $4.35, to $37.70, while Schlumberger's fell 2.9%, or $1.91, to $63.90, both in 4 p.m. trading Friday on the New York Stock Exchange.

Goldman Sachs & Co. advised Schlumberger on the deal. Smith was advised by UBS Investment Bank.

A Schlumberger-Smith pairing has long been the subject of rumors in the industry. The companies already work together closely through a jointly owned drilling fluids business, M-I Swaco, and Smith's top two executives--CEO John Yearwood and Chief Financial Officer William Restrepo--are former Schlumberger executives. The two sides came close to finalizing a deal at different times last year, only to have it fall apart over price considerations, said people familiar with the matter.

Acquiring Smith will make Schlumberger, which maintains headquarters in Houston, Paris and The Hague in the Netherlands, a major player in one of the few areas of the industry where it didn't already have a significant presence: manufacturing drilling bits. It will also give Schlumberger complete ownership over M-I Swaco, the drilling fluids business that has been jointly owned by the two companies since 1999.

"Smith's drilling technologies, other products and expertise complement our own, while the geographical footprint of Schlumberger means we can extend our joint offerings worldwide," Schlumberger Chairman and CEO Andrew Gould said in a statement Sunday.

Mr. Gould said the merger will result in savings of about $160 million in 2011 and $320 million in 2012. The company declined further comment.

The Schlumberger-Smith deal is the latest in a series of mergers in the sector as oil services companies seek scale. In May, Weatherford International Ltd. agreed to pay close to $500 million for the oil services business of the Russian oil company TNK-BP. In August, Baker Hughes Inc. agreed to buy smaller rival BJ Services Inc. for about $5.5 billion; that deal is expected to close later this year.

A wide breadth of services offerings and financial size have become increasingly important for services companies, which help oil companies locate and drill for oil deposits. As more and more of the world's oil is produced overseas, the industry's customers are increasingly state-run oil companies, which often prefer to work with companies that can offer a full range of products and services.

Big companies like Schlumberger are also taking advantage of weakness in their smaller rivals. The entire industry has struggled recently as global demand for energy has fallen, leading to less drilling for oil and gas. But Schlumberger's size and geographic diversity have helped the company weather the economic storm better than many competitors. That, combined with the company's $4.6 billion in cash and short-term investments as of Dec. 31, have prompted speculation that Schlumberger could snap up weaker rivals. Smith's profits fell 80.7% in 2009 from 2008.

Just last month, Mr. Gould told investors that the company was "still are actively pursuing opportunities in acquisitions."

The acquisition, Schlumberger's largest ever, sparked speculation that rivals such as Halliburton, Baker Hughes (BHI) and Weatherford (WFT) could be forced to make their own moves to keep up. But Mr. Pickering said he didn't see the deal setting off a wave of mergers.

"I don't think it alters the landscape in such a dramatic fashion that it forces folks to quickly and dramatically react," Mr. Pickering said.

But the deal could raise antitrust issues. U.S. authorities have yet to sign off on Baker Hughes' acquisition of BJ Services (BJS), even though the companies are in almost entirely different segments of the oil business. Analysts have said antitrust concerns will probably force Schlumberger to sell Smith's PathFinder Energy Services business, which helps evaluate oil reservoirs.

Schlumberger spokesman Stephen Whittaker said the companies don't anticipate antitrust problems.

The two companies have dealt with antitrust issues before. In 1999, the companies paid a combined $14.6 million for violating a 1994 anti-trust consent order in which Smith agreed not to sell its drilling fluids business to certain companies, including Schlumberger. When Smith and Schlumberger merged their drilling fluids businesses in 1999, a judge ruled they had violated the 1994 agreement.

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