The Halliburton/Baker Hughes merger has been delayed again. This time the two oil field services companies — the second and third largest oil field service companies in the United States, respectively — have until April to get the deal signed, sealed and delivered.
With yet another delay announced on the merger, it has become pretty clear that somehow Halliburton and Baker Hughes officials managed to pick both the best of times and the worst of times to try and pull this off.
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 oil field services industry were going toe to toe in an environment where they didn't have to compete on price, but then everything slowed down, according to energy economist Ed Hirs.
After oil prices started to tank with less than half the activity in the shale plays, there simply wasn't enough work to support both companies the way they were relying on shale plays at the peak of the shale oil boom a few years ago.
Thus it wasn't exactly a shock when the $34.6 billion merger was announced in November 2014. We'd known these types of mergers were likely to start happening since crude oil prices began to tumble in June 2014 in response to a glut of oil hitting the world market. It was a lone shareholder that 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. The agreement was approved by the shareholders of both companies in the spring but the deal still had to be cleared by federal antitrust regulators before it could really move forward.
“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," Hirs says."The Department of Justice probably had some anti-trust concerns predating the merger, but maybe the companies thought the downturn could justify it."
In fact it has proved less easy than expected to get the U.S. Department of Justice anti-trust regulators to sign off on the deal. On Tuesday the two companies issued a joint statement explaining that they are extending the self-imposed deadline to close the merger to April 30, 2016 because of the DOJ. Specifically:
"The DOJ has informed the companies that it does not believe that the remedies offered to date are sufficient to address the DOJ’s concerns, but acknowledged that they would assess further proposals and look forward to continued cooperation from the parties in their continuing investigation."
The thing is, the DOJ arguably has good reason to be wary of this merger. If it goes through, the combined companies will hold large portions of various parts of the oil field services market, as Forbes pointed out this week. (The new company would have 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 combined companies could easily undercut their competition and could start driving smaller companies out of the market.
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And it's not just the DOJ regulators that are not exactly jumping up and down about this proposed merger. European Union regulators initially rejected the merger proposal (the two companies have re-applied) and the Australia Competition And Consumer Commission has raised questions about this market share stuff too.
This comes despite the fact Halliburton and Baker Hughes have both been trying to sell off pieces of their respective companies to decrease the places they overlap and make the deal more palatable to the anti-trust regulators. It simply hasn't been enough and in an industry that is cutting the fat everywhere it possibly can — oil hit $35 per barrel last week and the projections for next year aren't exactly sunny — the pieces of these companies have been going at fire-sale prices.
But now there's the question of what will happen if the deal doesn't go through. On the outside of things, Halliburton is the immediate loser because the company will have to pay Baker Hughes $3.5 billion if the deal falls apart. However, it's Baker Hughes that could really be injured by this. “One of the real concerns if the merger doesn't go through is going to be whether Baker Hughes has been mortally wounded by shaving off profitable businesses and undertaking layoffs in anticipation of a merger coming to fruition. They've been making room for this to happen, so if it falls apart that's going to be big,” Hirs says.
For now, there's nothing to do but wait and see if the two companies can do enough to appease the DOJ and other anti-trust regulators. Both Halliburton and Baker Hughes are moving forward and coming off as confident that they'll ultimately pull this thing off, and there's no way of knowing what's going to happen next, Hirs says. “We're all speculating out here, because we really don't know what's going on in there. Nobody does. It's been over a year though, and they've got real problems with the EU and with U.S. anti-trust regulators. Those are the only things we can say with certainty.”