What's Next for Halliburton and Baker Hughes?
After months of speculation, Halliburton and Baker Hughes announced on Sunday that the second- and third-largest oil field service companies in the United States would not, in fact, be merging.
The merger was originally expected to be closed sometime last year, but it ended up stuck in limbo because antitrust regulators on various continents maintained the merger would hurt competition in the oil field services industry. Once the U.S. Department of Justice announced it was filing a lawsuit to block the merger early last month, it became clear that DOJ antitrust regulators were never going to allow the deal to go through. The announcement on Sunday that the companies were walking away from the deal was simply a formal acknowledgement that it was never going to happen.
Now that they're definitely at the end of the affair, the question is: What's going to happen next?
Baker Hughes already came out with plans to cut costs and start changing things around to deal with the reality of the low oil prices that have already put so many energy companies on the financial ropes.
Halliburton will be discussing the failed merger in its quarterly earnings report today, which may provide some insight into the company's game plan moving forward. Either way, Halliburton is set to pay the $3.5 billion "breakup" fee that it blithely agreed to back when it seemed like combining with longtime rival Baker Hughes would be easy to pull off.
Last week Baker Hughes noted in its quarterly earnings report that the company was stuck carrying $110 million in costs that couldn't be cut because its hands were tied by the merger agreement. On Monday Baker Hughes stated it was “taking immediate steps” to rid itself of the previously uncuttable costs. Now that the merger has been pronounced dead, the company has announced plans to shave off about $500 million in costs. Meanwhile, officials are also “evaluating broader structural changes." Baker Hughes officials plan on using the Halliburton no-merger fee to buy back about $1.5 billion worth of stock and to pay off about $1 billion in debt. The rest of the money will go for taxes.
"More than ever, our customers need to lower their costs and maximize production," Baker Hughes Chairman and CEO Martin Craighead stated in a release issued Monday. "We intend to build on our strong foundation and market position by simplifying the structure of our business and evolving our commercial strategy to deliver significant value to shareholders."
So Baker Hughes is moving on quick as can be, and Craighead is looking pretty good right now. The fact that it took some nudging to get the head of Baker Hughes on board with the merger has turned out to be very much in his favor, since he's now getting the largest breakup fee ever paid out from the company's longtime rival. At the same time, Halliburton's CEO, David Lesar, may find himself in a tough situation, since he took the risk and it ended up going so badly, as The New York Times pointed out.
However, Halliburton has the cash to pay up and while writing that check won't be fun, the company will be fine, according to the Wall Street Journal. We'll get a better idea of where Halliburton stands when the company holds its earnings call, but analysts say it looks like both the storied companies will be able to survive independently, the NYT reports.
And, much to the satisfaction of the DOJ, we're betting they'll go right back to being rivals.