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http://dealbook.blogs.nytimes.com/2010/02/23/excess-skepticism-on-schlumberger

›Excess Skepticism on Schlumberger?

February 23, 2010, 1:55 am

Schlumberger’s shareholders have been in a state since news leaked last week of the company’s bid for Smith International, its rival in the oilfield services sector. Skeptical investors have since stripped more than $5 billion from the value of Schlumberger, the industry leader, a powerful slap in the face of its chief, Andrew F. Gould. Such punishment appears excessive, Reuters Breakingviews says.

True, Mr. Gould has not negotiated a bargain for Smith. By Schlumberger’s own account, cost savings will be just $320 million a year by 2012. Taxed and capitalized, these would be worth about $2 billion to shareholders. So, by offering a $3 billion premium, at $45.84 a share, Schlumberger looks to be destroying around $1 billion of value.

But Schlumberger’s big tumble suggests that investors fear Smith may prove an even bigger liability, Breakingviews says. The deal may indeed tie up precious management time as the antitrust process grinds forward. Baker Hughes is still in a holding pattern while regulators vet the purchase of BJ Services, which it announced in August.

Apart from these anxieties, however, the deal has some powerful strategic logic on its side, Breakingviews says. It is hard to see a financial exploding gun in Smith’s balance sheet. The company’s $1.2 billion of debt is small potatoes for Schlumberger, which has cash and short-term investments of $4.6 billion.

Moreover, the absence of a significant drill maker, Smith’s forte, in Schlumberger’s product line is becoming an embarrassing omission. Recent oil finds are forcing companies to drill deeper for oil — more than six miles down in the case of BP’s giant find in the Gulf of Mexico. Complex shale gas operations are demanding ever more sophisticated drilling technology.

As extracting oil and gas becomes tougher, making sure that tools work perfectly together is becoming crucial. Mr. Gould has his sights set on a new generation of drilling technology. Meanwhile, giant state-run oil companies are increasingly demanding a full-service option.

Even if the deal fails to deliver a boost to revenue once the companies combine, it is hard to see how it can hurt them. Shareholders’ lack of faith in Schlumberger’s management is unfair, Reuters Breakingviews says. Mr. Gould has his work cut out proving investors wrong.‹