Why the Feds Couldn't Stomach the Halliburton/Baker Hughes Merger
U.S. Department of Justice antitrust regulators have been fairly unenthusiastic about the proposed merger between Halliburton and Baker Hughes, the second- and third-largest oilfield service companies in the United States. Now, thanks to the lawsuit the DOJ filed Wednesday, we have a much clearer picture of exactly why the feds just couldn't get behind Halliburton's takeover of Baker Hughes.
The short explanation is that the DOJ was and is convinced that such a deal would allow the company that emerged to wield way too much power in the oilfield service industry, the kind of influence that violates both the letter and the spirit of the antitrust laws regulators are supposed to enforce.
In the 38-page lawsuit, Halliburton shoulders most of the blame.
The DOJ points out that the oilfield service industry is already dominated by the "Big Three," Schlumberger, Halliburton and Baker Hughes, all globally integrated companies that supply myriad oilfield products and services to their customers. "They possess unrivaled product portfolios, research and innovation capabilities, and the scope and scale necessary to address the most difficult technological challenges facing the oil and gas industry they serve," the suit states, outlining the power these three companies already possess within the industry.
The deal would "eliminate substantial head-to-head competition, and it would likely lead to higher prices and less innovation," the DOJ argues in the suit. It would also violate sections of the Clayton Act, an antitrust law designed to stop any one company gaining too much power in a market before it has truly become a trust.
The DOJ notes that a mutual shareholder with both companies cooked up the idea of getting Halliburton to take over Baker Hughes in early 2014, an idea that Halliburton officials brought over to Baker Hughes in the fall of 2014. However, the lawsuit — like the SEC filings we've previously written about — makes it clear Halliburton was going to try to take Baker Hughes by force if that company's officials didn't agree to the $34.6 billion merger. Aside from the fact that Halliburton has been a longtime rival of Baker Hughes, the DOJ states in the lawsuit that the smaller company resisted the proposal at first specifically because of antitrust concerns.
"Halliburton prevailed upon Baker Hughes to take the legal risk of this transaction only by threatening a damaging hostile takeover bid and by offering a premium on the price of Baker Hughes' shares," according to the lawsuit. Halliburton also agreed to sell off $7.5 billion in assets and to pay a $3.5 billion reverse breakup fee if the merger ended up not being "consummated."
That promise to ditch assets is another issue for the DOJ. According to the lawsuit, Halliburton was continually changing the terms of the asset sales, but the plans never left Halliburton at a disadvantage in the industry:
"It appears to be among the most complex and riskiest remedies ever contemplated in an antitrust case. It would separate business lines and divide facilities, intellectual property, research and development, workforces, contracts, software, data, and other assets across the world between the merged company and the buyer of the divested assets. Many customer contracts would not be transferred. For some of the services for which the transaction is likely to lessen competition substantially, the proposed remedy fails divest many of the assets used to provide such services (such as tools, facilities, employees and contracts). The proposed remedy would thus leave the buyer dependent on Halliburton for services that are crucial to the business being divested."
And because of all that, the sold-off properties would never be as efficient, as innovative or as competitive as the merged mega-Halliburton company. The DOJ zeroed in on 23 markets where competition would ultimately be diminished. From providing various types of drill bits to offshore drilling techniques, Halliburton and Baker Hughes dominate the market along with Schlumberger. When it comes to items like fixed cutter drill bits, Halliburton and Baker Hughes together hold about 52 percent of the market. Combined, Halliburton and Baker Hughes hold 48 percent of the market for offshore directional drilling. Alongside Sclumberger, they're the only companies that perform offshore directional drilling and various other offshore drilling tasks. Basically, the DOJ has plenty of reasons — at least 23 — to keep these two companies apart.
Not only would the deal screw up the competitive climate in the oilfield services industry, the DOJ lawsuit contends it would wipe out a long-standing rivalry between the two companies. The thing is, that competitiveness between Halliburton and Baker Hughes has resulted in the development of "the most advanced technologies" and "game-changing" innovations from both. Merging the two companies would bring about the end of that drive to innovate and discover, according to the lawsuit.
So if the merger were allowed to go through, nothing would get better and everything would get worse, according to the DOJ lawsuit.
Halliburton issued a release on Wednesday announcing that both companies plan to fight the DOJ's attempts to kill the merger agreement. It'll be fascinating, if not downright hilarious, to see how Halliburton and Baker Hughes counter the DOJ's contentions. Either way, we have a feeling that the merger probably-maybe-definitely-no-way-in-hell will be closing by the end of April, despite that self-imposed deadline.
The DOJ even used this graph to show why it filed a lawsuit to stop this merger.
Image from U.S. Department of Justice