Consolidation in the drilling/oilfield services industrycontinued this week, with the announcement that Baker Hughes andWestern Atlas plan to merge in a tax-free, stock-for-stocktransaction valued at $5.5 billion. It will create a company with$6.5 billion in annual revenues and 36,000 employees.

The merger combines Baker Hughes’ strengths in drillingcompletion and production services with Western Atlas’ seismic andreservoir characterization activities. It creates the third largestoilfield services company in the world behind Schlumberger and theproposed merger of Halliburton Co. and Dresser Industries.

“Our efforts in integrated services have shown the need for acombination of our oilfield information technology capabilitieswith drilling, completion and production products and services,”said John R. Russell, president and CEO of Western Atlas andpresident of the combined company.

Under the terms of the agreement, which has been approved byeach company’s board, Western’s stockholders will receive 2.4shares of newly issued Baker Hughes common stock for each WesternAtlas common share. The combined company, which will retain theBaker Hughes name, will be based in Houston with Max L. Lukens,chairman, president and CEO of Baker Hughes, as the chairman andCEO of the new company.

Lukens said the merger is expected to be “modestly dilutive” toearnings in the first year and “significantly accretive to cashflow. In the second year and thereafter, the merger is expected tobe accretive to earnings. The merger is expected to generateapproximately $135 million in consolidation benefits in the firstyear.” Western Atlas stock closed the day up 11 5/8 at $93/share,but Baker Hughes stock fell 2 ¬ to $38 7/8/share.

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