McDermott International Bypasses Organic Growth With Its DeepSea Acquisition

| About: McDermott International, (MDR)

On Tuesday, McDermott International, Inc. (NYSE:MDR) announced the acquisition of subsea engineering company DeepSea. With the acquisition, McDermott adds approximately 100 engineers to its current roll of 800 engineers. Both McDermott and DeepSea cater to the offshore oil and gas industry and, according to its CEO, the acquisition enables McDermott to compete on a higher level in the subsea and European markets.

As Seeking Alpha contributor Trade In Mexico pointed out several days ago, McDermott is trading only a few points above book value as a result of earnings which came in below expectations. While this acquisition will most likely lower the $659 million in cash on McDermott's balance sheet, it will help the company better utilize its existing land-based fabrication facilities and construction vessels. The company currently operates fabrication facilities in Louisiana, Dubai, Indonesia, Mexico and China. These locations give the company access to many of the world's offshore oil fields while taking advantage of cheaper labor and materials. In addition to designing and constructing equipment for its clients on land, the company's construction vessel fleet allows the company to install equipment as well as lay enormous pipelines in some of the world's deepest water.

McDermott's press release indicates that, while it "intends to retain and expand the respected DeepSea brand," it will work to integrate part of DeepSea's engineers into McDermott's greater operations. Given that DeepSea's Houston and Asia Pacific operations overlap with those of McDermott's, the company will most likely fold those operations into the existing McDermott structure while leveraging DeepSea's European brand and contacts as a separate entity. Integrating DeepSea's operations into McDermott's should result in a savings in fixed overhead costs over the next few years while growing top-line revenues from a broader geographic and technical reach.

Overall, the acquisition of DeepSea should be a positive signal to shareholders that the company is undervalued given its growth potential over the next several years. Pursuing a bolt-on acquisition strategy in this case does not signify laziness or an inability to grow organically, but rather a smart method of quick entry into a lucrative market. Had McDermott attempted to penetrate the European market through organic growth, it could potentially have missed riding the current wave of expansion as Arctic waters are explored and new production brought online. As the subsea production arena heats up, McDermott's acquisition of DeepSea will position it to compete even better with the likes of other heavy hitting engineering companies such as Aker Solutions (OTCPK:AKKVY), Subsea 7 (OTCPK:SUBCY) and Ocean Engineering (NYSE:OII).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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