On September 22, 2014, Siemens (ticker: SIE), an $84 billion market cap engineering and electronics conglomerate based in Germany, announced the acquisition of Dresser-Rand (ticker: DRC) for $7.6 billion (Euros). Dresser-Rand is one of the world’s largest equipment suppliers in the oil and gas industry and specializes in rotating equipment solutions. The deal involves $6.4 billion in cash and the assumption of Dresser-Rand’s debt, which is $1.2 billion. Siemens hopes to close the transaction in summer of 2015.
Dresser-Rand will retain its name but will operate as an entity of Siemens after the deal is final.
What Siemens Gains
Siemens’ oil and gas segment acquires a multi-faceted position that covers all three levels of the industry. Dresser-Rand’s presence spans from gas lifts and power generation to transportation and sales, culminating in $3 billion of revenue in 2013. In a presentation covering the acquisition, Siemens identified Europe as its stronghold, while Dresser-Rand’s main operations are in the United States. At a Barclay’s conference on September 3, 2014, Dresser-Rand said 31% of its 2013 destination by revenue was from North America, while 26% was in Europe.
Dresser-Rand has a fleet of steam turbines and compressors at its disposal. The total number of units, once added to Siemens’ portfolio, will increase the company’s number of installed fleets to approximately 119,500 units from its current amount of less than 25,000. The Dresser-Rand deal comes on the heels of a $950 million (Euros) deal in May to boost Siemens’ presence in the gas turbine field.
“We do agree price has been on the high side,” said Josef Kaser, President and CEO of Siemens, in a conference call following the release. “But then again, it matters more what we have already created; we are absolutely clear that this is to be a major contribution to the further value creation within Siemens.”
Siemens, Pro Forma
Siemens’ main area of expertise is the production of gas turbines and equipment for natural gas extraction. Dresser-Rand’s specialty of compressors and turbines expands Siemens’ portfolio in the market, allowing Siemens to become a more streamlined entity.
The combination of the two companies will create additional cost savings thanks to bundling effects and access to field services. In the presentation, Siemens believes the efficiency will result in immediate savings of $180 million (Euros), and expanding to an additional $150 million (Euros) in realized annual savings by 2019.
Similar Case Study: General Electric
General Electric, now a competitor of Siemens, began its venture into oil and gas territory more than ten years ago, and its activity has increased simultaneously with the rising production rates in the United States. Rigs in operation are at the highest level since Baker Hughes began its rig breakdown in 1987. GE’s revenues have increased by 75% since 2009, which is the fastest rate of any segment of the conglomerate. A total of $17 billion in revenue was earned in 2013, and the company is developing new technologies to increase its footprint in the natural gas market.
GE forecasts an overall annual growth rate of 6% in all segments of oil and gas through the year 2017. Unconventional and LNG segments are expected to climb by 9% and 8%, respectively. Industry spending is already at a record, eclipsing the $700 billion mark this year.
GE has spent roughly $15 billion since 2002 in the creation of its oil and gas arm, including $11 billion on two separate deals in 2011. Among the acquisitions was $3.2 billion in the purchase of Converteam, an asset that helped GE build its case for energy efficiency, while another $2.8 billion was spent on a company specializing in hydrocarbon extraction from mature fields. Its landmark acquisition was in 2013, when Lufkin industries was purchased for $3.3 billion. GE was so convinced in the deal it sold its 49% stake in NBC Universal to finance it, ultimately providing the company with new access to pumping and power transmission technologies. GE management said as many as 94% of all wells will require an artificial lift at some point in their lifetime – an instrumental factor in the purchase.
At an oil and gas investor day on September 10, 2014, GE management noted its current revenue exceeds the money spent on previous acquisitions and emphasized the importance of entering the market early. The company believes energy demand will climb another 40% by the year 2035 and aims to “outpace” the market by innovating new technology and implementing its current market position.
Siemens Game Plan
Like its competitor, Siemens believes it is getting a jumpstart on a growing industry, with its main focus being on the use of compressors.
“If you look at just the number of opportunities in the upstream with many countries looking for more energy, the announcements around offshore installations, offshore field developments, the number of orders and such for FPSOs, all of those activity areas are very applicable for our current and new portfolio,” said Lisa Davis, Managing Director for Siemens. The company has historically used a 15% ratio in regards to cash return, and management believes it can achieve such a level in roughly three years, which is believed to be ample time to truly mesh the new business.
The company believes industry demand will flatten through 2015 before ramping up again as offshore developments and LNG projects progress. Siemens believes new business will account for 33% of income once the expected increase of offshore/LNG activity occurs, compared to Dresser-Rand’s current ratio of 25%.
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