M&A; A Path to Improve

Ramin Forouzandeh
Senior Strategist

Reducing Costs or Increasing Revenue

Over the past decade, Merger and Acquisition has grown worldwide in the drilling industry. More than $50 billion was spent by oilfield service providers during the last year for M&A processes. The process of developing M&A is noticeable especially in large and competitive markets (such as the United States and Canada).
The minimal presence of the government in the oil sector of these countries provides the conditions for companies to move towards M&A for growth or survival in comparison with many Middle Eastern countries, faced with widespread and even monopoly of government.
According to Ernst & Young, more than 170 transactions were recorded in M&A transactions in 2016 that showed reduction in comparison to 2013. In terms of  value, we have seen a record-breaking $53 billion. That figure is almost $20 billion higher than the previous record.
Major part of M & A value in 2016 was due to two main transactions: the acquisition of Baker Hughes by the GE Oil and Gas Division, and the Merger of FMC with Technip.
M&A Strategic logic includes an unlimited set of options such as increasing the range of customers, increasing bargaining power, reducing costs, developing service provision, and vertical or horizontal Merger. Trade among the companies owing rigs usually occurs in order to increase the fleet, take advantage of the cost-effective scale and increase the range of customers. Such mergers have made a significant contribution to the growth of onshore drilling companies in North America. M&A has also been expanding in recent years in the offshore drilling sector. Issues such as the development of a service portfolio or the provision of new solutions may be on the agenda among the companies offering several drilling services. In recent years, some of the mega-mergers have been linked to this logic. Strategic logic can also be used to create a monopoly in the market, when market watchdogs confront with it. In a general split, the M & A results in increase of productivity, which appears to be either a form of cost reduction or an increase in revenue. Reducing costs is usually more straightforward and less time-consuming, while increasing
revenue will be more difficult and more time-consuming. Companies usually focus on lowering costs in a short time.
For example, the tangible results of the transaction are announced as lower costs when the results of M&A are reported to shareholders, as it is more certain and shareholders can see the results as soon as possible. On the opposite side, the revenue-generating effects of the merger are practically related to several factors, such as transaction success or market conditions, and in many cases may not have any effects at all.
Moving towards M&A in the last decade, especially in the recent years can be attributed to several factors. One of these factors is either the direct or indirect demand of the market to reduce costs, especially when the prices are low. The source of revenue for drilling service providers is the cost to oil companies (exploration and production actors).
Therefore, the cost reduction as a result of the reduction in oil prices is also transferred to service providers. They may need solutions to stay in the market and support their demands. This is the way that speeds up the shift to M&A. Another important factor is the company situation. As the market shrinks, the more inefficient actors are eliminated. If the M&A does not happen, not only the brand, but also the assets of a company will face decrease in market value. Important
losers are corporate shareholders who may go bankrupt. Debtors also face the perspective that they may never receive a small fraction of their claims, even though they have a priority over the shareholders to receive their claims. As a result, the total stakeholders conclude that the M&A could be the best option, even if it is valued far below the peak times. With any logic to examine the result and the reason for M&A, it is clear that the produced synergy will usually be one of the factors of the company’s long-term growth and the improvement of the industry. In the drilling industry, such a process is common among the onshore and offshore rig owners, providers of various drilling services, equipment manufacturers, and other industry players. However, M&A decisions cannot guarantee a successful move by itself.
It is necessary to investigate a series of studies on market conditions, the strategic logic of M&A, financial results and requirements, legal dimensions, organizational characteristics, and maturity of the two organizations before a M&A decision. M&A may encounter problems at the implementation stage, which cannot success or lead to failure even with the assumption of strategic logic and appropriate estimation. Therefore, there is usually a team of people to do this whose members are not limited to managers of the two organizations and include a set of institutions and experts in the field of finance, law, auditing and engineering.