The General Electric (GE) and Baker Hughes (BHI) partnership could potentially be the "most disruptive" cross-sector merger this year, as a J.P. Morgan analyst believes the deal "looks better" today than when it was first announced at the end of October.
"Our key incremental takeaway is the power of access to the GE Store and the leveraged effect of tapping into GE's network that could alter Baker's competitive positioning," wrote analyst Sean Meakim in a research note Friday. "As a somewhat distant third diversified competitor, BHI had little to lose and much to gain if it could pursue a disruptive path, particularly one that accelerates growth." The firm maintained its Neutral rating on BHI shares with a $41 price target.
Baker Hughes will have full access to the GE Store, which as Meakim puts, "enables the sharing of research and engineering, so materials developed in one business, for example, become accessible to others." This means services, supply chain elements, manufacturing facilities can all be shared, giving Baker Hughes the "potential for more sophisticated product development by tapping into the shared technology," Meakim notes. He also believes it will drive further cost reduction by eliminating redundancies in the research and development process.
For the J.P. Morgan analyst, this opportunity is the "most compelling rationale for the deal," meanwhile, Action Alerts PLUS portfolio managers Jim Cramer and Jack Mohr, who hold GE in the charitable trust, believe GE's Predix platform is the key to the deal.
"We believe the true underlining motivation for the deal aligns with GE's efforts in big data via its Predix platform," wrote Cramer and Mohr in a recent note to subscribers. "Importantly, GE has the scale and technological expertise to succeed in this space and has only added to its offerings through ownership of a new Baker Hughes, which will bring forth a larger client base for Predix, allowing for additional learning capabilities and a larger stage to prove its worth," they added.
Similarly, Meakim believes the Predix system will provide an opportunity to better connect oil services equipment and use the data for internal and customer use. Furthermore, the ability to monitor Baker Hughes' asset performance should allow the new company to more efficiently utilize equipment.
Considering that Baker Hughes and GE have little overlap in product and service lines, Meakim thinks should enable the companies to avoid major regulatory hurdles prior to closing. The transaction is expected to close in mid-2017.
By that point, however, Donald Trump will be the president sitting in the Oval Office and the regulatory rules could have changed. Trump is a dealmaker, as evident from his book, "Trump: The Art of the Deal," in which he writes that his style of deal-making is simple and straightforward.
"I aim very high, and then I just keep pushing and pushing and pushing to get what I'm after."
What he is after in terms of energy is directly opposed to the current policies of the Obama Administration. He claims that he will "unleash American's $50 trillion in untapped shale, oil and natural gas reserves, plus hundreds of years in clean coal reserves." Yet, the details on how he plans to do so are unclear.
But, this partnership should enhance domestic production for Baker Hughes and make them more efficient.
"GE can better take advantage of the oil recovery as Baker Hughes as invested heavily for onshore oilfield activity, an area that is capitalizing on the uptrend while GE's offshore assets lag behind," Cramer and Mohr noted recently.
Given this, it seems plausible that current President-elect Trump and his Department of Justice would not oppose the deal.
Investors also shouldn't be shying away from this deal as Real Money's technical analyst Bruce Kamich says now is the time to buy GE.
"GE has corrected sideways, and its decline since July brought it to a long-term uptrend line," Kamich said. "This is your chance to buy GE at relatively low risk."