Activist investor Steel Partners has announced its intention to nominate multiple candidates to the board of Rowan Companies (NYSE:RDC), parent of Rowan Drilling and LeTourneau Technologies (Rowan’s manufacturing unit). Steel Partners contends that investors would be rewarded if Rowan were to spin off its manufacturing business from its contract drilling division, which generates the majority of the company’s consolidated revenues and earnings. While history indicates that such “sum of the parts” calculus can benefit stakeholders in particular cases, certain factors suggest to us that separating Rowan Drilling from its manufacturing unit might in the long run do more harm than good.
The reason lies in the unique competitive position that Rowan Drilling has carved out for itself -- and carefully nurtured -- over the years. As much as any company we follow in the oilfield, Rowan focuses on performance and service at the customer level with steadfast single-mindedness. Seemingly everything it does is with the objective of ensuring that customers receive the kind of equipment, service and results they can’t get elsewhere. The net result is that in EnergyPoint’s most recent independent survey covering providers of drilling and wellsite services, Rowan Drilling rated No. 1 overall in terms of customer satisfaction. This is no small feat given that the rankings included both drilling contractors and service providers.
But what does this have to do with Steel Partners’ apparent plans for Rowan? Well, Rowan Drilling’s strong reputation and extensive goodwill with customers –- and thus its potential to charge premiums compared to its peers over time -- is driven in part by the quality, reliability and availability of its equipment; and much of its equipment is designed, manufactured and maintained by the very unit Steel Partners appears to be proposing to jettison. While it is true that selling LeTourneau would not preclude Rowan Drilling from continuing to purchase LeTourneau’s products, becoming “just another customer” of LeTourneau with no way of ensuring ongoing product quality or availability could in the end serve to erode the distinctive market position that Rowan Drilling has worked so hard to establish.