What Was Really Going on During the Halliburton-Baker Hughes Merger

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Thanks to some corporate filings made public on Monday, we've now got a glimpse of the drama behind last month's merger of oil industry giants Halliburton and Baker Hughes.

According to a joint filing with the Securities and Exchange Commission yesterday, the two Houston-based oil field services companies only sealed the deal (which still has to be approved by regulators) in November after threats of a hostile corporate takeover, last-minute ultimatums, and a spat over $3.3 billion that boiled over into the business press. Ultimately, the two companies -- which combined employ about 15,000 people in Houston -- agreed to a $34.6 billion buyout of Baker Hughes. Amid falling oil prices, Halliburton has since announced plans to cut 1,000 jobs across its operations in the Eastern Hemisphere.

Monday's SEC filing fills in some of the behind-the-scenes details of the massive corporate merger. Here are a few takeaways:

The idea for merging apparently came from a single shareholder

According to Monday's filing, the last time the two oil field services companies had "substantive discussions" about merging was all the way back in 2005. And even then, talks never got too far - the companies never exchanged detailed proposals until this year.

Why? Well, a couple of things. Free-falling oil prices made any type of merger much more attractive by this summer, when, according to SEC filings, Halliburton execs started asking their Credit Suisse advisers and Baker Botts lawyers to look into how the two companies might merge.

But, according to Monday's filing, a single shareholder had already planted the merger bug in Halliburton CEO Dave Lesar's ear in January 2014. The stockholder, who isn't named in the company's filings, approached Lesar and asked him to consider acquiring Baker Hughes. Halliburton management then met privately with the stockholder, "and the stockholder explained its rationale for an acquisition," according to Monday's filing. The company even presented the idea to Halliburton's board of directors. With stock prices still high, the board at the time thought a merger would be too expensive.

Halliburton's board began to seriously reconsider by June.

Hardball, Halliburton style

In August, two months before Halliburton CEO Lesar called for a meeting with Baker Hughes execs to talk merger, he'd already asked the company's advisers at Credit Suisse to consider options for a hostile takeover in case acquisition talks failed, SEC filings show. In fact, the day after Lesar first met with Baker Hughes CEO Martin Craighead in October to talk about a deal, Halliburton quietly bought 100 shares of Baker Hughes so the company could have standing to nominate a new slate of Baker Hughes directors, should it get to that point.

By November 3, Lesar sent a letter to Craighead, saying the negotiations weren't moving fast enough for Halliburton's liking. "We do not understand why so little has occurred in the last three weeks," Lesser wrote. He added, "we prefer a friendly transaction," but threatened a run on the rival company's board.

Craighead responded in a letter the next day, saying "Halliburton insists on pressuring our Board to make a decision without the full and careful consideration necessary to protect our stockholders." In the ensuing weeks, the final asking price ultimately became the sticking point: Halliburton only wanted to pay $32.8 billion, while Baker Hughes execs thought the company was worth $36.1 billion.

In an email to Craighead the morning of November 12, Lesar wrote, "I must say it was an amount that shocked me and clearly is one that we cannot accept." Lesar gave Baker Hughes until 3 p.m. that day to consider Halliburton's offer, or else the company would move forward with a hostile takeover.

The brief pre-deal public pissing-match was a negotiating tactic

With Leser's deadline looming, Baker Hughes execs called a special meeting and decided to go public with the ongoing negotiations "in order to maximize leverage with Halliburton and thus maximize stockholder value," according to Monday's filing. On November 13, the Wall Street Journal "broke" the story, and by the end of the trading day Baker Hughes' stock price had jumped 15 percent from the previous day's closing.

Still at a $3.3 billion impasse, Halliburton told Baker Hughes on November 14 that it was going to nominate a new slate of directors for the company. In an email to Craighhead, Lesar called the move "a legal matter," just to keep their options open.

It would seem Baker Hughes was sufficiently pissed off by that point. The company issued a press release expressing its "disappointment" in Halliburton execs (while also releasing some of Baker Hughes letters' to the company, likely an effort to make Halliburton look like the bully). The next day, after Baker Hughes called a special meeting, CEO Craighhead wrote this terse message to Lesar:

"In response to your two messages last night, it is not possible to pretend that your effort to replace our entire board with your nominees is 'just a legal matter.' It is coercive in every sense of the word.

We were willing to meet and continue negotiations in order to reach a mutually satisfactory conclusion. If you convey a reasonable response to our counterproposal we will respond."

And with that, Halliburton budged, raising its offer over the next two days by about 5 percent. On November 16, Baker Hughes' board of directors approved the deal.

The deal only looks better in hindsight

As the Chron points out, the price of oil continued its precipitous decline before the ink even dried on the Halliburton-Baker Hughes deal. When the deal was struck in November, oil was trading above $75 a barrel. It's hovered around $55 a barrel for the past week.

Bill Herbert, an analyst with Simmons & Co., says the long-term benefit of the deal only rises as oil prices weaken. Here's what he told the daily:

"There's a downturn looming in 2015... It's going to be a harsh one, both domestically and internationally. The deeper and harder this downturn, the greater the imperative for consolidation."

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