HOUSTON – The market downturn of the past few years has forced offshore contractors and service companies to look for mergers and alliances that provide diversification opportunities, complementary capabilities, and economies of scale.
One key example of this trend is the McDermott-CB&I merger, announced in December 2017.David Dickson, President and CEO of McDermott, explained the rationale behind the merger yesterday at OTC 2018 in Houston, and provided some historical context.
“Four years ago, McDermott was facing some very serious issues,” Dickson noted. The company was facing significant financial problems, and relationships with key customers had become strained. “Fortunately, we were able to get through it.”
The company embarked upon a three-stage process that included stabilizing the business, optimizing the business, and transforming the business. It repaired its relationships with Saudi Aramco and BP, which are its top two customers now.
“We did it by focusing on people and changing our culture,” Dickson said. In this “stabilize” phase, he noted, there was a 75% change in McDermott’s leadership positions. This enabled the company to move from away from a mere survival mode, and move toward success in the marketplace.
In the “optimize” phase, the company got its costs under control. The question then was how to transform the company into something larger, that could compete more effectively in the marketplace.
In 2016, Dickson told McDermott’s board of directors that the company balance sheet had been stabilized, and that the company would survive. But he also told them that still faced a choice: McDermott “was too big to be specialized, but too small to really compete against the major competitors.”
“We had to ask ourselves, ‘What is it we could do to make a difference?’” So we set ourselves on a journey looking at both organic and inorganic opportunities.”
“Bear in mind,” Dickson told the audience, “that we did not have a lot of cash. The only currency we had was in our equity.”
In his view, there were three key avenues to transform the company: through the use of new technologies; by becoming more diversified; and “by building up to scale so that we could compete more effectively with out competitors.”
In 2017, CB&I became available for acquisition. “CB&I was strong in the onshore downstream business, and this could complement McDermott’s offshore upstream business,” Dickson noted.
CB&I would also enable McDermott to diversify its offshore exposure into the onshore engineering, procurement, construction and installation business, and to create a vertically integrated company.
“So as we looked at CB&I, it clearly met our goals in terms of new technologies, diversification, and opportunities to build to scale,” Dickon said. “At the same time, we understood that there would be challenges with the acquisition.”
The key, Dickson said, would be to implement the same type of turnaround process with CB&I that McDermott had used to transform itself. “Today we are working on that path, and we are getting very close to completing the deal.”
“So the story of McDermott is one of turnaround and transformation, but transformation focused on diversification rather than consolidation,” Dickson observed.
Today, McDermott’s shareholder’s vote on the merger. Regulators have already signed off on it.