It Looks Like the Feds Have Killed the Halliburton/Baker Hughes Merger
Image by Monica Fuentes and Thinkstock.com
Update 1:00 p.m.:
On Wednesday the U.S. Department of Justice filed a lawsuit seeking to block Halliburton's proposed acquisition of rival oil field services company Baker Hughes, alleging that the transaction threatens to eliminate competition, raise prices and reduce innovation in the oilfield services industry, according to the lawsuit.
The department filed its lawsuit in the U.S. District Court for the District of Delaware, where both companies are incorporated. The lawsuit contends that combining longtime rivals Halliburton and Baker Hughes, the second and third largest oil field service companies in the United States, respectively, would eliminate head-to-head competition in markets for 23 products or services used for on- and off-shore oil exploration and production in the United States, according to the suit.
"The proposed deal between Halliburton and Baker Hughes would eliminate vital competition, skew energy markets and harm American consumers,” Attorney General Loretta E. Lynch said in a prepared statement. “Our action makes clear that the Justice Department is committed to vigorously enforcing our antitrust laws. In the days ahead, we will continue to stand up for fair deals and free markets, and for the American people we are privileged to serve.”
According to DOJ, the two companies that wanted to merge were simply too big. “This transaction is unprecedented in the breadth and scope of competitive overlaps and antitrust issues it presents,” Assistant Attorney General Bill Baer of the department’s Antitrust Division said in prepared statement. “Halliburton and Baker Hughes are two of the three largest integrated oilfield service companies across the globe, and they compete to invent and sell products and services that are critical to energy exploration and production. We need to maintain meaningful competition in this important sector of our economy.”
Despite all this damning rhetoric about fair deals and free markets, Halliburton and Baker Hughes apparently aren't going to just accept that this is the end of the line. On Wednesday morning Halliburton issued a release on behalf of both companies stating that they intend to "vigorously contest" the DOJ's effort to block the pending merger.
You can read the feds' lawsuit to block the merger here:
On the heels of a lawsuit filed Monday in which the U.S. Department of Justice directly criticized the proposed merger between the two Houston-based oilfield service giants Halliburton and Baker Hughes, the Houston Chronicle is reporting DOJ regulators are going to file a lawsuit to block the deal.
In other words, it appears the long struggle to complete a merger between the two companies is about to be formally axed by the Feds.
When contacted Tuesday, DOJ officials wouldn't confirm or deny the Chron's report. Neither company would comment on the supposed pending legal action by the feds.
This may seem like a sudden shift after DOJ antitrust regulators spent months silent and on the fence about Halliburton's taking over Baker Hughes, but the Feds arguably had reason to look askance at the pitch to allow the second- and third-largest oilfield service companies in the United States to become one mammoth company.
In some ways, the idea for the merger came along at the perfect time. The $34.6 billion merger was announced in November 2014, just a few months after oil prices had started tumbling in response to a glut of crude oil hitting the world market. But the idea for the merger had actually been in the works months before the decline of the oil industry. A lone shareholder actually pitched the idea of the merger to Halliburton CEO Dave Lesar in January 2014, according to Security and Exchange Commission filings on the deal.
(Halliburton in particular was so eager to see the deal happen that Lesar had Credit Suisse advisers reviewing options for a hostile takeover just two months before the two companies worked out the formal agreement to merge, according to the SEC filings.)
There were a lot of reasons that these two oilfield service companies' becoming one huge company made sense for them at the time. Before the bust, drilling in the Eagle Ford Shale in South Texas, the Wolfberry Shale in West Texas and the Baaken Shale in North Dakota was so brisk that Halliburton and Baker Hughes were able to compete with each other without having to resort to lowering their prices to pull in customers. Two of the largest competitors in the oilfield services industry were going toe to toe in an environment where they didn't have to compete on price. That was fine when oil prices were up around $100 per barrel. But after oil prices started to tank, there was less than half the activity in the shale plays and there simply wasn't enough work to support both companies without their having to compete based on lower prices.
“They had a choice: They could either bloody each other on the way down, or they could merge and maybe save, between the two of them, one work force and one management team. The problem is that with the combination, there would clearly be less competition on price and the anti-trust authorities aren't stupid; they didn't miss it," University of Houston energy economist and professor Ed Hirs recently told us. "The Department of Justice probably had some anti-trust concerns predating the merger, but maybe the companies thought the downturn could justify it."
In spring 2015, shareholders of both companies approved the deal, but DOJ antitrust regulators asked Halliburton and Baker Hughes to provide more information about how, exactly, the two companies intended to get together without violating antitrust laws.
Halliburton officials announced the company would sell off about $7.5 billion worth of assets to make the deal more palatable to regulators, but the Justice Department asked Halliburton to get rid of about $10 billion worth of assets. That quickly became a problem. While it made plenty of sense for the two companies to merge because of the oil bust, the downturn in the oil industry also took the liquidity out of the industry, which means no one had the cash to actually buy any of the properties that both Halliburton and Baker Hughes were trying to sell.
And then there was the main reason the DOJ regulators have apparently been wary of this merger: the antitrust concerns. The regulators weren't exactly wrong to be worried about that either. The combined companies would have held large portions of various parts of the oilfield services market. (The new company would have controlled 36 percent share in the pressure pumping market, 48 percent of the completions equipment and services market, and 49 percent of the market for cementing services, for instance.) With that kind of dominance, the new mega-company could easily undercut the competition and start driving smaller firms out of the market.
Meanwhile, the DOJ isn't the only regulatory entity to be uncomfortable with the bid to bring the two companies together. European Union regulators initially rejected the merger proposal and have raised their own concerns about potential antitrust issues in the European energy market. Now it looks as if it won't matter what the EU's antitrust regulators decide because the deal is apparently dead as a door-nail.
But we have to wonder if this way out has actually given Halliburton a way to avoid paying the price of not closing the deal. Halliburton was supposed to be on the hook for a $3.5 billion breakup fee if the merger didn't go through. The company would have had to pay the fee to Baker Hughes at the end of April if the two failed to meet their self-imposed deadline to complete the merger. However, will Halliburton pony up the money considering it didn't walk away from the deal so much as the federal government busted the deal up? That's something to keep an eye on as the non-merger unfolds.
The other issue will be what happens to Baker Hughes. As we've reported before, Baker Hughes was the company being taken over, so company officials made room for Halliburton by laying off employees and selling otherwise profitable businesses in anticipation of a merger that it looks like will never be completed. That could mean some tough times for Baker Hughes moving forward.
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