Oilfield services leader Schlumberger Ltd aims to gain market share in shale gas drilling with its purchase of rival Smith International Inc, and expects few antitrust hurdles for the takeover.

Investors' belief in the deal's potential gained traction on Monday, with Smith shares extending their early gains and closing 8.8 percent higher at $41.03. Schlumberger trimmed its early losses and closed 3.7 percent lower at $61.57.

On a conference call with analysts on Monday, Schlumberger Chief Executive Andrew Gould said he had been considering the acquisition for some time, and the timing now was right, even though he acknowledged paying a significant premium.

The stock market had shaved about $700 million off the original $11.3 billion value as of Monday's close.

But analysts welcomed Gould's move to get his hands on Smith's drillbit technology, in which the company made its name when it was founded 108 years ago in California's oil boom.

The bits is a really cool business, and Smith is the best at that, said Doug Sheridan of EnergyPoint Research Inc.

Under the terms, Smith shareholders will receive 0.6966 shares of Schlumberger for each of theirs.

That originally valued Smith at a 37.5 percent premium over Thursday's closing share price, according to a joint statement by the companies on Sunday. They expect the deal, subject to shareholder and regulatory approval, to close this year.

Schlumberger expects the acquisition to add to earnings per share in 2012, after realizing pretax savings after costs of about $160 million in 2011, and double that the next year.

Schlumberger said later on Monday that in the event of a deal termination, Smith may have to pay a fee of $340 million.

Big oil services players, which also include Halliburton Co and Baker Hughes Inc, say clients, and state-run oil companies in particular, increasingly demand more services from a single provider.

So Schlumberger, operating in about 80 countries, wants Smith drillbits to give clients the option to drill deeper and cheaper for fossil fuels, and has its eyes on the fast-growing market for extracting natural gas from shale rock.

No doubt, in the long-term, shale gas is going to be one of the big new energy sources in the U.S. and overseas, Gould said, and the capacity to serve that market in North America is of great interest to me.

Gould does not believe antitrust issues will cause any change in the landscape of the acquisition.

Analysts say the deal is likely to face close scrutiny by antitrust enforcers given the attention paid to other oilfield services mergers, such as Cameron International Corp's NATCO purchase and the $6 billion purchase of BJ Services by Baker Hughes, which is due to close this quarter.

Many anticipated a sale of Smith's PathFinder business, which logs data while drilling, and UBS analyst Angie Sedita put its price tag at $600 million to $700 million.

Tudor, Pickering Holt expects Schlumberger to jettison many of the assets Smith acquired when it forked out $2.7 billion for W-H Energy at the peak of the oil market boom in mid-2008.

Barry Nigro, an antitrust expert at law firm Fried Frank, noted that oilfield services had already undergone a fair amount of consolidation, and the head of the DOJ's antitrust division had said she intends to focus on the energy industry.

So I think it's an area that is likely going to get a closer look than usual, he said, though the real question was how long the review would take and what would have to be sold.

A decade ago, a U.S. court fined Schlumberger and Smith for violating a 1994 consent decree to keep their drilling fluid arms separate, but analysts say that case settled the problem.

Smith CEO John Yearwood will be very familiar with any issues surrounding their M-I SWACO drilling joint venture, of which Smith owns 60 percent, having been a Schlumberger representative on its management committee.

Both he and Smith Chief Financial Officer William Restrepo worked at Schlumberger for two decades, with Yearwood's final two years spent as senior adviser to Gould.

EnergyPoint's Sheridan, like many analysts, expects Smith's low-margin Wilson Supply business to be sold eventually.

(Reporting by Ernest Scheyder and Steve James in New York, and Braden Reddall in San Francisco; Additional reporting by Diane Bartz in Washington; Editing by Lisa Von Ahn, Tim Dobbyn, Bernard Orr, Phil Berlowitz)

California Energy