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General Electric to combine energy unit with Baker Hughes

General Electric, led by Jeff Immelt, moved its headquarters to Boston in August.Brian Snyder/Reuters/File 2016

General Electric Co.’s chief executive, Jeff Immelt, is muscling his way into the number two position in the oilfield services industry — but he isn’t paying top dollar to get there.

Instead of buying the oil and gas services company Baker Hughes outright, Immelt and his team at Boston-based GE have engineered a different kind of deal: GE unveiled plans on Monday to merge its oil and gas equipment business with Houston-based Baker Hughes, paying $7.4 billion to Baker Hughes shareholders as part of the deal.

In exchange, GE would get a nearly two-thirds stake in the new publicly traded company, which would keep the Baker Hughes name.

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Both operations are fairly similar in size: The combined company would essentially double their size, with a total of about 70,000 employees worldwide, operations in 120 countries, and about $32 billion in revenue, based on 2015 figures. It would still be smaller than the industry leader, Schlumberger Ltd.

The deal is expected to be completed next year and start to add to GE’s earnings in 2018.

A long run of low oil prices has been a big driver in the industry’s deal-making. Combining forces is one way of battling the slump. As major energy clients such as Exxon Mobil and BP scaled back the pace of their projects, companies like GE and Baker Hughes suffered from fewer orders.

The impact in Massachusetts remains unclear: GE has oil-and-gas operations in the state in Billerica and Randolph. A spokeswoman said the units would continue to operate as usual until the deal is completed, with decisions about how best to integrate the combined company’s operations coming later.

But job cuts are expected in some parts of the global operations, if GE wants to achieve a target of $1.2 billion in cost savings by the year 2020.

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The new company would be led by GE’s top oil and gas executive, Lorenzo Simonelli. It would have dual headquarters: in London, where Simonelli is based, and in Houston. Immelt would chair the new company’s board, and GE would appoint a majority of the board’s directors.

“This was a unique opportunity [and] we wanted to grab it,” Immelt said on a conference call with analysts Monday. “We’re putting in place a broad and deep technology service company . . . There’s a lot we can learn from each other.”

GE’s play for Baker Hughes came about after another one fell apart.

Rival Halliburton had proposed acquiring Baker Hughes in 2014, in a deal then valued at $35 billion, but the merger plan was abandoned earlier this year in the face of the federal government’s antitrust concerns.

The new deal isn’t expected to cause significant antitrust problems, however, because GE and Baker Hughes offer largely complementary services in the oil and gas industry, with little significant overlap.

Immelt tried to downplay the role that oil prices had in the latest deal. GE officials expect the new company to report $34 billion in annual revenue by 2020, based on only a modest increase in oil prices between now and then.

“Our thesis was never driven around trying to time the price [of oil],” Immelt said.

The Baker Hughes deal represents an effort to bring GE’s data-analysis technology to a broader range of oil and gas projects, reflecting “this notion that the industry was going to become technically sophisticated as time went on,” Immelt said. “That’s what we’ve been betting on all along.”

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That sentiment reflects Immelt’s broader vision for GE. In recent years, Immelt has pared the company back by divesting most of its financial services work and its home-appliance business so it could instead focus on “digital industrial” business lines, marrying its software development arm with its remaining manufacturing work.

That shift in focus, to become a more software-oriented firm, was a key reason behind GE’s decision to relocate its headquarters this year from suburban Connecticut to Boston’s Fort Point section.

The Baker Hughes deal won praise on Monday from analysts and investors.

Nick Heymann, an analyst with the investment bank William Blair, said the deal provides an important opportunity for GE to extend its analytics capabilities from ocean-based energy projects to oil and gas fracking wells throughout North America. “They have a way to get a key in the door,” he said.

Buying Baker Hughes outright would have been significantly more expensive for GE, Heymann said, and probably wouldn’t offer the same tax benefits to shareholders that this partnership offers.

“It’s a smart move to not sit and pray for a recovery [in oil prices] in 2017 and 2018,” Heymann said. “GE is saying, ‘We’re not hoping for that, we’re going to make our own luck, by structuring this alliance.’ ”

GE’s share price remained essentially unchanged on Monday, ending the day at $29.10.

But a key GE shareholder, the investment firm Trian Partners, offered praise in a prepared statement for the deal and its structure, saying that “the combination has strong industrial logic, combining complementary businesses to create a best-in-class company” in the oil-and-gas industry.

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The deal still needs to be approved by regulators and Baker Hughes shareholders.


Jon Chesto can be reached at jon.chesto@globe.com. Follow him on Twitter @jonchesto.