June 27, 2018 / 1:17 AM / 5 months ago

The culture clash behind GE's quick exit from Baker Hughes stake

HOUSTON (Reuters) - When General Electric Co bought oilfield services giant Baker Hughes last July, it created a global industry colossus with $22 billion (£16.62 billion) in annual revenue.

FILE PHOTO: The logo of General Electric Co. is pictured at the Global Operations Center in San Pedro Garza Garcia, neighbouring Monterrey, Mexico, on May 12, 2017. REUTERS/Daniel Becerril

GE promised to digitalize oilfields worldwide, marrying its expertise in big data, analytical software and subsea equipment with Baker Hughes’ experience in drilling services, chemicals and tools.

Less than a year later, GE is bailing out of the deal, the firm announced Tuesday, planning to sell its 63 percent stake in the combined firm over time as part of a larger move to simplify its business and reduce debt.

The retreat comes amid slipping market share, management missteps and culture clashes that have unsettled employees and frustrated suppliers and customers, according to data reviewed by Reuters and interviews with more than 30 employees, former employees, recruiters, analysts, suppliers and customers.

GE managers initially took 11 of the combined firm’s top 15 posts and ushered in a by-the-book culture more like its aviation business than that of oil industry, where relationships are more prized and handshake deals are still common, said people who have had dealings with both.

In a Tuesday note to employees seen by Reuters, Baker Hughes GE Chief Executive Lorenzo Simonelli complimented his “amazing team” and reassured them about the path ahead, but acknowledged “the last year has not always been easy for you, or our customers and partners.”

“I recognize that this moment is bittersweet for some, welcomed perhaps by others,” he wrote.

Baker Hughes GE lost market share in 12 of 19 services and equipment sectors between 2016 and 2017, according to a Reuters analysis of data from prominent oilfield services consultancy Spears & Associates. In one area where Baker Hughes has been a pioneer, drill bits, its share fell to 17 percent from 20 percent between 2016 and 2017.

In a statement to Reuters, Baker Hughes GE attributed the market share losses to “challenging market dynamics” and said most of the losses occurred before the merger closed in summer of last year.

Since the merger, suppliers have chafed under strict cost-cutting demands, and some customers shifted to competitors after abrupt service-fee increases and contract changes, according to suppliers, customers and former Baker Hughes executives. The choppy transition also has driven out veteran Baker Hughes managers in key departments and rattled staff.

Revenue for the combined company last year was $21.9 billion, well below the $23.8 billion estimated in its 2017 merger proxy.

Baker Hughes GE oilfield services and equipment revenues declined by $700 million. Rivals Schlumberger and Halliburton posted higher revenues on a resurgence in the North American hydraulic fracturing market, said Chirag Rathi, a consulting director at market researcher Frost & Sullivan. Baker Hughes sold a majority of its hydraulic fracturing business in 2016.

Baker Hughes GE said its financial performance reflects broader industry trends and called itself a “strong and differentiated company” that now has a “defined path” to unwind the merger over the next two or three years. It said it would stay focused on supporting workers, customers and boosting shareholder value.

Baker Hughes GE’s shares were up 2 percent to $33.13 on Tuesday, but still down nearly 18 percent since the merger closed.

The company will now set about dividing itself before ever fully integrating the two firms. While the combined culture remains a work in progress, “the old Baker Hughes structure has been torn apart,” said Edward Muztafago, director of equity research at Societe Generale.

It remains unclear whether Baker Hughes will continue to benefit from GE’s financial clout and advanced manufacturing over the long term.

Last year, Baker Hughes landed a major deal with Twinza Oil to provide oilfield services, equipment and financing for an offshore development near Papua New Guinea. Analysts say access to credit and lending from GE Capital, a unit GE is now planning to shrink, helped that deal come together.

For now, Baker Hughes will continue to have access to vaunted GE technologies that were cited as key advantages in the original merger, including the GE Store, a technology and manufacturing exchange, and GE’s Predix operating system, which links and monitors equipment through the internet, the company said. But the company said Tuesday it would also develop solutions independent of the Predix system.

ABRUPT PRICE HIKES, CONTRACT CHANGES

Shortly after the merger closed last year, Baker Hughes GE made an “overnight” decision to raise prices and internal sales targets, a former employee told Reuters. The moves, along with squeezing costs from supplier contracts, aimed to raise revenue and margins.

While oilfield margins have modestly improved, they still trail well behind those of top rivals Schlumberger and Halliburton, said Bernstein analyst Colin Davies, who noted the oil-price recovery has driven margin gains industrywide.

One privately-held U.S. oil producer that uses Baker Hughes GE’s artificial lift products said the company raised its service prices by 20 percent late last year with little notice. The customer shifted some of its business to a rival, Novomet Inc, even after Baker Hughes GE agreed through negotiations to trim the increase.

“They’re not managing the account as personally as they need to,” the customer said, declining to be named because of ongoing business between the two firms.

Baker Hughes GE declined to comment on its pricing except to say it makes regular adjustments to stay competitive.

Suppliers also have faced post-merger changes to contract terms and procurement processes. One company told Reuters that Baker Hughes GE pressed for a 3.5 percent discount on goods and a 120-day grace period on payments, terms the company rejected. Normally, customers pay within 30 to 60 days, the supplier said.

One dispute escalated into a breach-of-contract lawsuit. Manufacturer Markall Inc built a successful business supplying components to Baker Hughes over four decades, but the relationship quickly deteriorated after the merger.

In the suit, filed in November, Markall alleges Baker Hughes GE had not paid for more than $5 million in custom parts that it had agreed to buy before the merger.

Baker Hughes GE declined to comment on the lawsuit, saying it deals with issues predating the acquisition.

EXODUS OF EXECUTIVES

GE Chief Executive John Flannery, appointed shortly after the merger, foreshadowed Tuesday’s announcement last November when he said the firm was considering its “exit options” just months after acquiring its controlling stake.

Then the company cancelled a planned switch of former Baker employees to GE’s healthcare plan, several former Baker Hughes and GE Oil & Gas employees told Reuters. A move to cut staff just ahead of end-of-year holidays also hurt morale, two former workers said.

Another sign of strain: the departure of veteran employees in key positions, according to more than a dozen sources familiar with the resignations.

More than 50 resumes from Baker Hughes employees have landed with one professional recruiter since last summer, according to a headhunter there.

FILE PHOTO: A Baker Hughes sign is displayed outside the oil logistics company's local office in Sherwood Park, near Edmonton, Alberta, Canada November 13, 2016. REUTERS/Chris Helgren/File Photo

Melissa Law - a 20-year Baker Hughes veteran and former president of its global chemicals business - joined food ingredients supplier Tate & Lyle last September. Eric Holcomb, formerly a Baker Hughes director of financial planning, left after more than a dozen years to join marine shipping company Kirby Corp in December.

Chief Global Operations Officer Belgacem Chariag - one of a handful of Baker Hughes executives to remain in senior management after the merger - resigned in January without announcing a new position.

Chariag did not respond to a request for comment. Baker Hughes declined to comment on the departures but called its overall retention rates “strong and in line with the market.”

Reporting by Liz Hampton; Additional reporting by Andres Guerra Luz in New York; Editing by Gary McWilliams and Brian Thevenot

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