Why profitable companies feel need to get bigger fast

With a thrust into deeper water and a shortage of capacity, people, and equipment, equipment firms are merging to assure supplies. Equipment as vital as this combination traction winch/windlass, shown being loaded aboard the semisubmersible Atwood Hunter, is critical. (Photo courtesy of Continental Emsco-Smatco) Almost every week, there is another merger or acquisition announcement in the offshore, upstream sector of the petroleum industry. Shipyards are consolidating rapidly and service

11gom

Buying suppliers to ensure availability when needed

William Furlow
Contributing Editor
11gom
With a thrust into deeper water and a shortage of capacity, people, and equipment, equipment firms are merging to assure supplies. Equipment as vital as this combination traction winch/windlass, shown being loaded aboard the semisubmersible Atwood Hunter, is critical. (Photo courtesy of Continental Emsco-Smatco)


Almost every week, there is another merger or acquisition announcement in the offshore, upstream sector of the petroleum industry. Shipyards are consolidating rapidly and service companies are on a buying spree.

Transocean merged with Sonat, Reading & Bates found fellowship with Falcon, and Halter bought TDI, along with everything else that might generate business. Freide Goldman, flush from the near vertical climb in share value since its summer initial public offering (IPO), just purchased the shipyard in Newfoundland that helped build the Hibernia platform.

In the 1980's, merger was synonymous with cutbacks and layoffs. Well into the 1990s, companies would merge and immediately set about stripping out all redundant personnel and departments, selling off what they could to pay for the deal. At that time, a merger was seen as a cost saving measure and the kind of activity favored by companies on the ropes.

Search for excess

With current third quarter earnings up 100% over last year, no one would mistake Halter Marine Group for a company in trouble. The firm recently announced the acquisition of AmClyde Engineered Products, Utility Steel Fabrication, and Fritz Culver. This is in addition to its buyout of Texas Drydock and Bludworth Bond Ship Repair last spring. What is the motivation for such quick expansion?

Matt Simmons, investment banker and President of Simmons and Co., believes the new mergers are of a different breed than those that dominated the marked over the last 10 years. Simmons said the public still looks on such actions favorably, but employees have nothing to fear. These companies are not looking for cutbacks, they are looking for excess - excess personnel, excess capacity, and excess capital. Simmons said as all aspects of the construction and drilling markets continue to tighten, more mergers of this type will come about.

Rick Reese, executive vice-president of Halter marine Group, said Simmons' analysis is on the money with his company's purchase of TDI and Bludworth. He said the strategic acquisition of TDI is a perfect example. Halter has put this company into the business of building mobile offshore drilling units and not only retained all the employees, but added 500 workers over a six-month period.

The company bought Bludworth Bond to increase its presence in the ship repair business and has added employees in this sector as well. As far as the recently announced smaller acquisitions, Reese said these were part of a vertical integration strategy Halter has launched to ensure its yards has the components they need to deliver jobs on time.

Continental Ensco, which recently bought Smatco Industries did so with an eye to adding yard space and critical technology. Smatco builds mooring systems and large wenches. With its Houma, Louisiana location on the Intracoastal Waterway, the company can lower winches right onto barges, saving Ensco the cost of transporting these from inland facilities.

Ensuring supplies

The winch manufacturing sector of the offshore construction business has grown five-fold over the last 18 months, according to Larry Richards, vice-president of marketing at Continental Ensco. This means the only way to ensure a winch will be delivered when needed is to buy the company. Richards said he has no plans to lay anyone off as a result of the acquisition. "Actually, we're adding about 20-30 people to their work force."

When Continental Ensco originally proposed its pending buy of Gregory Rig Service, a provider of onshore well servicing and workover rigs, there was some reluctance on the part of employees. Richards said his company had to clear up concerns about cuts in staff.

"We are buying the capacity and marketing, but more importantly, we're buying the technical expertise," he said.

Simmons said this is a common misunderstanding because of past mergers, and actually may contribute to the reluctance of some people to enter the oil and gas business, Simmons said. Those considering such work should understand that these mergers are not a threat to job security, according to Simmons. Even if the work a person was doing before a merger is judged to be redundant, the employer will certainly be able to find other work for that person.

Dennis Heagney, president of Transocean, which recently merged with Sonat, said his company's association was based on the traditional rationale for an acquisition. He said the two companies combined their strengths, but stripped out redundancies and did have some layoffs.

Heagney said there are a number of factors that go into such a major decision, but it is mainly an opportunity to combine strengths and cut costs. Heagney said there is definitely a benefit in acquiring a company with expert personnel, but it was not the driving factor of this deal.

Simmons said he believes this trend is just beginning and will become clear in years to come as bottlenecks become more pronounced and companies become desperate to increase capacity and manpower.

Copyright 1997 Oil & Gas Journal. All Rights Reserved.

More in Company News