History Suggests GE-Baker Hughes Deal Could Be A Win-Win For Shareholders

Baker Hughes Incorporated BHI shares are down about 6 percent following an announcement that General Electric Company GE and Baker Hughes will be merging their oil & gas assets into a brand new company.

The complex merger/spinoff proposal is far from a typical buyout. Baker Hughes shareholders get $17.50/share in a cash dividend and will control 37.5 percent of a newly-formed company. GE will control the majority 62.5 percent.

It seems as though the market believes GE got the better end of the deal. While Baker Hughes shares are selling off on Monday, GE shares are about even.

However, it’s important to keep in mind that both GE shares and Baker Hughes shares are up 1.5 percent and 7.9 percent, respectively, in the past five trading sessions.

Similar Combo

The potential merger/spinoff combo is similar in structure to the type of deal Hewlett Packard Enterprise Co HPE put together with Computer Sciences Corporation CSC earlier this year. In that deal, HP Enterprise spun-off its technology services operations to combine with Computer Sciences Corporation and form a new $26 billion service giant. HPE received a 50 percent stake in the new company and a cash dividend of $1.5 billion. In addition, HPE dumped $2.5 billion in liabilities on the newly-formed company.

Baker Hughes and GE investors are likely more interested in how Computer Sciences and HPE shares reacted to the news. In the one month following the deal’s announcement, HPE (potentially played by GE) shares surged 22.2 percent, while Computer Sciences (played by Baker Hughes) jumped 48 percent.

Clearly, the terms of the two deals aren’t the same, and the companies themselves are entirely different. However, the HPE and Computer Sciences deal shows that, in principle, these types of merger-spinoff combinations can be a win-win for shareholders of both stocks involved.

Disclosure: The author is long BHI.