Schlumberger and Smith in merger talks

Oil services giant Schlumberger is in advanced talks to acquire its smaller rival Smith International, according to a report in the Wall Street Journal.  The paper said that a deal between Schlumberger and Smith, who both have headquarters in Houston, Texas, could be announced in the next few days, though it could not say how much such a deal would be worth.  However, with Smith International valued at roughly $7.5 billion, the purchase price could be around the $9 billion mark, if the company were acquired at a 20 percent premium.  A merger would create an industry giant with revenues double that of SchlumbergerÔÇÖs closest rival, Halliburton, which is also based in Houston.  Schlumberger is already the industry's biggest company, with 2009 revenues more than 50 percent higher than Halliburton. It carries a market capitalization of around $79 billion.  The companyÔÇÖs size and wide range of services enables it to offer customers competitive package deals on the expensive process of finding and extracting oil.  Smith International is one of the largest global providers of products and services to operators of oil and natural gas development activities. It is one of the biggest producers of oil field drill bits, among other equipment.  Schlumberger had a difficult year last year as the global recession slowed the demand for drilling operations worldwide, with its profits falling 42 percent in 2009 from 2008.  SmithÔÇÖs profits fell by just over 80 percent in the same period.  However, prices have since recovered and Schlumberger said in its most recent earnings report in January that its business will benefit as countries start to burn more fuel.  Schlumberger's size and geographic diversity have helped it to fare better than most of its competitors. The company also has $4.6 billion in cash and short-term investments, which has prompted speculation that it could be seeking to acquire weaker rivals.  According to reports, the two companies came close to finalizing a deal at different times last year, only to have it fall apart over price considerations.  The fact that Smith does most of its business outside North America makes it particularly attractive to Schlumberger, which has a strong international focus. The two companies already work together through a jointly owned drilling fluids business, M-I Swaco.  The current deal, if it is finalized, will be likely to face antitrust scrutiny in the US and overseas.  It will also put pressure on competitors such as Halliburton and Geneva, Switzerland-based Weatherford International to pursue similar transactions.