Baker Hughes Incorporated Business Information, Profile, and History

Company Perspectives:

Our employees deliver performance at the well site by applying their technical knowledge, practical experience, and dedication to quality service. Our people have built a high performance culture, based on our Core Values of Integrity, Teamwork, Performance and Learning. Baker Hughes has introduced programs to encourage, recognize and reward Flawless Execution at the rig site. We support field performance with a worldwide operations network organized around specific product lines to enable best-in-class planning, logistics, equipment repair and technical service. We believe that when customers "Measure and Compare" our performance to that of our competitors, they will choose Baker Hughes as their preferred supplier.

History of Baker Hughes Incorporated

Baker Hughes Incorporated is the product of the 1987 merger of two oilfield-services companies with surprisingly similar histories, Baker Oil Tools and Hughes Tool Company. Both were founded shortly before World War I by aggressive entrepreneurs who won valuable patents and earned gushing royalties on early oil-extraction devices. Both continued as domestic powerhouses until, at slightly different cues, they embarked on massive worldwide expansion and diversification projects. Baker and Hughes became public companies within ten years of each other as the influence of their founding families diminished. The two rivals experienced the fluctuations of an unpredictable world oil market jarred by political and economic events. Finally, the companies suffered financial slumps in the lean years of the 1980s, leading to their turbulent but successful consolidation.

There were differences, however, between Baker Oil Tools--later Baker International Corporation--and Hughes Tool. Hughes became the neglected plaything of Howard Hughes, Jr., the founder's famous billionaire son, who used the oil company's constant wellspring of cash to finance ventures in airplanes, real estate, and motion pictures. Baker, on the other hand, built a reputation, through careful yet ambitious expansion, as one of the industry's best-run firms, largely on the efforts of E.H. Clark, an executive whose tenure spanned 40 years. In the early 2000s, Baker Hughes, the offspring, ranked as a leading provider of products and services to the world petroleum and continuous process industries. Its size and influence was not solely a result of the merger, but of a number of key post-1987 acquisitions, the largest of which was the $3.3 billion purchase of Western Atlas, Inc., completed in 1998.

History of Hughes Tool Company

The invention of the first rotary drill bit, used to drill oil wells through rock, led to the creation of Sharp-Hughes Tool Company in 1909. Howard Hughes, Sr., and Walter Sharp developed and manufactured the rotary drill bit, an invention so important to the fledgling oil industry of 1909 that variations of the same bit are used today. When Sharp died in 1912, Hughes bought Sharp's share of the business. Hughes incorporated the business the following year, and in 1915 dropped Sharp's name from the company. Armed with the exclusive patent to an essential product, Hughes brought his Houston-based company unrivaled market dominance for decades. Even after many key patents expired, during the 1930s and 1940s Hughes Tool was able to dominate the drill-bit business. During World War I Hughes developed a boring machine that could drill into enemy trenches. Explosives then could be dropped into the trenches. Although the secretary of war personally thanked Hughes for his contribution, the machine was never used because of the sudden shift, toward the end of the war, from trench warfare to active warfare.

If the market dominance of Hughes Tool was secured by the elder Howard Hughes before World War I, its tenor as an undiversified, closely held giant was set by the founder's son and namesake. The 19-year-old Howard Hughes, Jr., inherited the company in 1924 following the death of his father. Under Hughes, Jr., the oilfield-product company became a massive enterprise that he used largely to fund his various avocations. During World War II Hughes operated a gun plant and a strut-making facility for aircraft, in Dickinson, Texas.

Howard Hughes--who founded Hughes Aircraft Company, purchased over 78 percent of TransWorld Airlines' stock and held a substantial investment in RKO Pictures--remained the sole owner of Hughes Tool until 1972, when he put the company on the market. Hughes Tool became a publicly owned company, in a transaction reportedly valued at $150 million. Although successful, despite a general slump in the drilling industry from 1958 to 1972, Hughes Tool had remained undiversified, primarily because Howard Hughes wanted it that way. "Mr. Hughes, of course, felt he was personally diversified, so he never really considered diversifying the tool company," Raymond Holliday, a former Hughes chairman, told Business Week in October 1980. With public stockholders and a booming oil economy, especially after the Organization of Petroleum Exporting Countries (OPEC) oil embargo of the early 1970s, Hughes Tool made up for lost time, bringing on worldwide acquisitions and start-up projects.

Under the leadership of chairman James Lesch the firm purchased the Byron Jackson oilfield-equipment division of Borg-Warner in 1974, for $46 million. In 1978 Hughes bought Brown Oil Tools, another family-owned business, whose founder had underutilized his 377 lucrative patents. With its massive expansion and the favorable oil-industry climate, Hughes Tool surged. By 1981--a peak year in the industry--new business activities, which largely meant non-drill-bit products and services, accounted for 55 percent of the company's sales.

When the bottom fell out of the market in 1982, Hughes found itself a bloated, overextended, and debt-ridden concern. Under the guidance of President William Kistler, an engineer who came up through the core drill-bit division, the company retrenched to its roots, concentrating on bits and shying away from services. For example, the company shut down 30 foreign offices and streamlined 11 divisions into one. In 1983 Hughes hired outside consultants Bain & Company to trim fat, laying off 36 percent of its workforce. The company still had one weapon neither world markets nor competitors could take away: a patented O-ring rock-bit seal. In 1986 Hughes won a $227 million patent-infringement judgment from Smith International, Inc., a California concern that had copied Hughes's drill seal too closely. In 1985 Hughes had been awarded $122 million from Dresser Industries, Inc. for patent violation. One rival that had innovated around Hughes's patent rather than copying it was Baker International.

Hughes Tool floundered through the mid-1980s. For the three years beginning in 1983, Hughes lost $200 million. Often cited as a potential takeover target, the company was faced with an offer it could not refuse when approached for a merger with Baker.

History of Baker International Corporation

Like Hughes Tool, Baker grew out of a single invention--the Baker Casing Shoe--a device to ensure the uninterrupted flow of oil through a well, developed in 1907 by Californian Reuben C. "Carl" Baker. Baker licensed his patents and incorporated the Baker Casing Shoe Company in 1913, mainly to protect his numerous patents on products that would soon become the industry standard. During World War I Baker was a member of the local draft board, although his company did not devote any of its production to goods to support the war effort. Baker lived off his royalties until the 1920s when he began manufacturing his own tools. In 1928, after successfully manufacturing tools in Huntington Park, California, for several years, Baker called the company Baker Oil Tools, Inc., a name it would carry for 40 years.

The Great Depression hit Baker hard, causing it to lay off numerous workers, but the late 1930s and 1940s were years of solid growth. During this period the company started offices in many states, including Texas, Wyoming, Illinois, Missouri, and Louisiana. During World War II Baker retooled to produce gun-recoil mechanisms. Following the war Baker prospered. In the ten years after 1948 it opened 50 new offices in 16 states. In 1956 Carl Baker retired at age 85, leaving the company in the hands of Theodore Sutter, an executive who had joined the company in the early 1920s. Carl Baker died shortly after his retirement. Under Sutter the company began to expand globally, and it went public in 1961.

When E.H. "Hubie" Clark, Jr., assumed control of Baker in 1965, the company developed into a global powerhouse. Clark, who had joined the company as a recent mechanical-engineering graduate from the California Institute of Technology in 1947, led Baker, now based in Orange, California, to new heights. Although Baker remained based in California, in 1965 the company's Houston operation was as large as the California operation. Clark acquired some 20 companies, the largest of which was Reed Tool Company, a drill-bit manufacturer purchased in 1975. Clark worked hard to predict trends in oil supply and demand. Baker operations were begun in Peru, Nigeria, Libya, Iran, and Australia, among other countries, and in 1976 the company changed its name to Baker International Corporation.

The company's reputation for quality and Clark's renown as a manager put Baker into the 1980s in solid shape. Even Baker could not avoid the downturn of petroleum-related business after 1981. Clark and Baker President James D. Woods sought to improve efficiency in the slow-growing industry. The eventual answer was to merge with its Houston-based competitor, Hughes Tool. Both companies had been losing money, and they hoped to eliminate overproduction by merging.

Merger of Baker and Hughes in 1987

"This industry is plagued with overcapacity," said one Baker official, as he announced on October 22, 1986, that the two oil-services firms would merge. Wall Street immediately applauded the move, a complex stock swap that favored Baker stockholders by giving them one share of the new company for each share they owned, compared with an eight-tenths-of-a-share deal for Hughes shareholders. Reflecting the greater general strength of Baker, its executives were to be given the top posts: Clark was to be the new chairman and Woods the new president and chief executive officer, while William A. Kistler, Hughes's chairman, would be named the merged company's vice-chairman. The new company's home would be Houston, where Hughes was based, and where Baker already had extensive operations. Baker's Orange, California, headquarters housed relatively few employees.

Wall Street showed its excitement over the merger by trading up the stock prices of both companies following the merger announcement, but the federal government frowned on the potential antitrust ramifications of combining two such powerful outfits. Indeed, the U.S. Justice Department announced on January 25, 1987, that it would attempt to block the merger, citing reduced competition in markets for some oil-exploration machinery. As top executives worked out a consent agreement with the Justice Department, Hughes executives attempted to pull out of the merger. Baker responded in strong terms: it would sue Hughes for $1 billion if it failed to carry through with the agreement. After several delays Hughes capitulated. On April 3, 1987, Hughes agreed to the terms of the consent decree--which included the divestiture of the domestic operations of Reed Tool Company and some other units--and the merger was completed, creating an oil-services company second in size only to Schlumberger Limited.

Post-Merger Years Marked by Restructuring, Divestments, and Acquisitions

The consolidated company did not stop charging forward after the merger. Baker Hughes Incorporated outpaced its competition in the late 1980s. Part of its success was in realignment: Woods slashed 6,000 jobs, closed several plants, and took a $1 billion write-off for restructuring expenses. The result was $90 million less in annual costs and impressive sales. The company was already profitable by fiscal 1988. Woods added the chairmanship of Baker Hughes to his title in 1989.

Throughout the late 1980s and early 1990s, Baker Hughes did not hesitate to divest itself of unprofitable and/or noncore operations and to bolster the company through acquisition. In May 1989 its longtime money-losing mining equipment operation was sold to Tampella Ltd. of Finland for $155 million. In April 1990 Baker Hughes added the world's leading maker of directional and horizontal drilling equipment, Eastman Christensen Company, in a $550 million deal with Norton Co. The U.S. Department of Justice approved the deal, but only after Baker Hughes agreed to divest its own diamond drill business. In 1992 Eastman Christensen was merged with Hughes Tool Company to form a new division called Hughes Christensen Company.

In 1991 Baker Hughes divested Baker Hughes Tubular Services and also spun off to the public its profitable but lawsuit-plagued BJ Services Inc. pumping service unit. Parker & Parsley Petroleum Co. had filed suit against Baker Hughes and Dresser Industries--the two of which had originally jointly owned the predecessor of BJ Services--alleging that BJ Services had shortchanged Parker & Parsley on materials used to stimulate wells. A 1990 jury verdict awarding Parker & Parsley $185 million was later overturned, but in 1993 the three parties settled out of court for $115 million, with Baker Hughes and Dresser each responsible for half, or $57.5 million.

In 1992 Baker Hughes spent $350 million to buy Teleco Oilfield Services Inc. from Sonat Inc. Teleco was a pioneer in services for both directional and horizontal drilling. Later that year, Teleco and four other Baker Hughes companies specializing in drilling systems--Milpark Drilling Fluids, Baker Sand Control, Develco, and EXLOG--were combined into a new Baker Hughes INTEQ division, which enabled the company to offer comprehensive solutions for all phases of drilling projects.

Divestments continued in 1994 with the sales of EnviroTech Pumpsystems to the Weir Group of Scotland for $210 million and of EnviroTech Measurements & Controls to Thermo Electron Corp. for $134 million. In October 1995 Max L. Lukens, who had been with the company since 1981, was named president and chief operating officer, with Woods remaining chairman and CEO.

After enjoying its best post-merger year to date in fiscal 1996 (with $3.03 billion in revenues and profits of $176.4 million), Baker Hughes was busy in 1997 making acquisitions, three of which closed in July. Drilex International Inc., a provider of directional drilling services, was acquired for $108.8 million and was subsequently folded into Baker Hughes INTEQ. The company paid $751.2 million for Petrolite Corporation, thus augmenting its specialty chemical division which was soon renamed Baker Petrolite and which became the leading provider to the oilfield chemical market. In the third July purchase, the Environmental Technology Division of German machinery maker Deutz AG was bought for $53 million; the division specialized in centrifuges and dryers and added to the existing centrifuge and filter product lines of the Baker Hughes Process Equipment Company. Then in October a $31.5 million deal to purchase Oil Dynamics, Inc. from Franklin Electric Co., Inc. was completed. Oil Dynamics was a manufacturer of electric submersible pumps used to lift crude oil and it was added to the company's Centrilift division. The year 1997 was also noteworthy for the retirement of Woods, who had not only made the Baker Hughes merger happen but had also focused and bolstered the company's product and service lines through more than 30 separate divestments and acquisitions. Woods was succeeded by Lukens.

The 1998 Western Atlas Merger and Succeeding Years

Consolidation in the oil-services industry continued in 1998, with the largest deal being the acquisition of Dresser Industries by Halliburton Company. Baker Hughes kept pace with its industry rivals, and maintained its number three position among oil-service firms (behind Halliburton and Schlumberger), by acquiring Western Atlas Inc. in August 1998 for $3.3 billion in stock and the assumption of $1.3 billion in debt. Western Atlas, which had been spun off from Litton Industries Inc. in 1994, was the industry's leading geoscience firm, specializing in seismic exploration, reservoir description, and field development services, as well as down-hole data services. The acquired operations were placed within two new Baker Hughes divisions: Western Geophysical for the seismic services and Baker Atlas for the down-hole services. Baker Hughes could now offer a full range of oilfield services, or "life-of-the-field" packages, from seismic surveys to drilling to production management. Following the merger, Lukens remained in charge of Baker Hughes as chairman and CEO.

As it was completing the Western Atlas merger, Baker Hughes began to feel the effects of another severe industry downturn. Demand for oilfield services declined sharply during the second half of 1998 as a result of the combined effects of the Asian economic crisis, tropical storms, and slumping oil prices. The company went into cost-cutting mode, slashing about 10,000 jobs from the payroll by the end of 1999 (about one-fourth of the total workforce), consolidating manufacturing facilities and field offices, and achieving nearly $1 billion in cost savings. Charges for merger-related costs and restructuring expenses totaled more than $800 million for 1998, resulting in a net loss for the year of nearly $300 million. Baker Hughes also sold off some real estate to raise money to reduce its enlarged debt load, upgraded its information technology systems to improve the tracking of inventory and equipment, and created a new financial performance system in which a manager's performance would be tied to profits in the person's area.

Despite the new initiatives and restructuring efforts, as well as higher oil prices in the later months of the year, Baker Hughes's financial performance continued to suffer during 1999. In November the company warned that its fourth-quarter earnings would trail analysts' estimates. One month later the company announced that it had uncovered accounting irregularities at its INTEQ division amounting to $31 million; the firm was subsequently forced to restate its earnings for the previous three years. In the wake of this debacle, INTEQ's president was replaced, and in February 2000 Lukens resigned under pressure. Joe B. Foster, a Baker Hughes outside director and head of Newfield Exploration Company, was named interim chairman and CEO. Wall Street was growing increasingly skeptical about the prospects for a turnaround, with Warburg Dillon Read analyst Byron Dunn telling the Wall Street Journal that the accounting snafu was "a symptom of a broader dysfunctional corporate culture."

To further reduce the still-burdensome debt load, Baker Hughes announced in February 2000 that it would sell its process systems unit, which had little relation to the core oil-services operations. Unable to sell it as a whole, the company divided the unit into three entities in 2001: BIRD Machine, EIMCO Process Equipment, and a newly formed joint venture, Petreco International, which was 49 percent owned by Baker Hughes. EIMCO was subsequently sold to Groupe Laperriere & Verreault, Inc. for about $50 million in November 2002.

In the meantime, Baker Hughes and Schlumberger reached an agreement in June 2000 to combine their seismic units, Western Geophysical and Geco-Prakla, respectively, into a new joint venture firm called Western GECO. Schlumberger paid Baker Hughes about $500 million to take a 70 percent stake in the venture, while Baker Hughes took the remaining 30 percent. Upon completion of the deal in November 2000, Baker Hughes used the proceeds to further reduce its debt.

In August 2000 Michael E. Wiley was hired to be the new chairman, president, and CEO of Baker Hughes. Wiley had been the president and COO of Atlantic Richfield Company from 1997 until May 2000, when that firm was acquired by BP Amoco. Baker Hughes continued to trim its operations under the new leader, announcing in October 2000 its intention to exit from the oil and gas exploration and production business. By early 2003 this exit had been completed through the sale of a 40 percent stake in a Nigerian oil field.

Although the company's financial performance improved in 2001 and 2002, concerns about the corporate culture at Baker Hughes once more came into the foreground. The Securities and Exchange Commission (SEC) charged that two high-ranking company officers, the CFO and the controller, authorized the payment of a $75,000 bribe to an Indonesian government official in March 1999. (The two officers both resigned later in 1999.) The bribe was made to induce the official to reduce the company's tax liability from $3.2 million to $270,000. This was a violation of the Foreign Corrupt Practices Act. The SEC further alleged that similar payoffs had been made in India and Brazil. In September 2001 Baker Hughes reached a settlement with the SEC regarding these charges, without the firm admitting or denying the charges and without a fine being levied. Then in March 2002 a former Baker Hughes employee filed a civil lawsuit claiming that he had been fired in October 2001 for refusing to pay a bribe to a Nigerian oil official in order to secure a large drilling contract. Both the SEC and the Justice Department soon launched investigations into the matter.

Principal Subsidiaries: Western Atlas Inc.; Baker Hughes GmbH (Austria); Baker Hughes (Deutschland) GmbH (Germany); Baker Hughes INTEQ GmbH (Germany); Baker Hughes Limited (U.K.); Baker Hughes Canada Company; Baker Hughes Espana, S.L. (Spain); Baker Hughes SRL (Venezuela).

Principal Divisions: Baker Atlas; Baker Oil Tools; Baker Petrolite Corporation; Centrilift; Hughes Christensen Company; INTEQ; BIRD Machine.

Principal Competitors: Schlumberger Limited; Halliburton Company; Smith International, Inc.; Weatherford International Ltd.; BJ Services Company; Precision Drilling Corporation; Petroleum Geo-Services ASA; John Wood Group PLC; GE Betz; Ondeo Nalco Energy Services, L.P.; Grant Prideco, Inc.; Sandvik Smith AB; Compagnie Générale de Géophysique, S.A.; Veritas DGC Inc.

Chronology

• Key Dates:
• 1907: Reuben C. "Carl" Baker develops the Baker Casing Shoe, a device to ensure the uninterrupted flow of oil through a well.
• 1909: Invention of the first rotary drill bit leads to the creation of Sharp-Hughes Tool Company, led by Howard Hughes, Sr., and Walter Sharp.
• 1912: Sharp dies, and Hughes buys Sharp's share of the business.
• 1913: Baker organizes Baker Casing Shoe Company to hold and license his patents.
• 1915: Hughes renames his company Hughes Tool Company.
• 1924: Upon Hughes's death, ownership of Hughes Tool passes to Howard Hughes, Jr., who over the next several decades uses the firm's steady inflow of cash to fund his various avocations.
• 1928: Having expanded into the manufacturing of his own tools, Baker changes the name of his company to Baker Oil Tools, Inc.
• 1961: Baker Oil Tools goes public.
• 1972: Hughes Tool is taken public.
• 1975: Hughes acquires drill-bit maker Reed Tool Company.
• 1976: Baker Oil Tools changes its name to Baker International Corporation.
• 1987: Hughes Tool and Baker International merge to form Baker Hughes Incorporated.
• 1990: Eastman Christensen Company, maker of directional and horizontal drilling equipment, is acquired.
• 1991: Company spins off its pumping service unit, BJ Services, to the public.
• 1992: Eastman Christensen is merged with Hughes Tool Company to form a new division, Hughes Christensen Company; Teleco Oilfield Services Inc. is acquired; Teleco and four other Baker Hughes drilling systems companies are combined into a new division, Baker Hughes INTEQ.
• 1997: Petrolite is acquired, augmenting the firm's specialty chemical division, which is renamed Baker Petrolite; Drilex International Inc., provider of directional drilling services, is purchased and merged into Baker Hughes INTEQ.
• 1998: Baker Hughes acquires Western Atlas Inc., resulting in the creation of two new divisions: Western Geophysical (seismic data services) and Baker Atlas (down-hole services).
• 1999: Discovery of accounting irregularities at INTEQ division lead to a restatement of prior years' earnings.
• 2000: Baker Hughes contributes Western Geophysical to a joint venture with Schlumberger called Western GECO, 30 percent owned by Baker Hughes.