What's Going on With the Halliburton/Baker Hughes Merger?

Things have been quietly rolling along in the merger between two of the largest oil field services companies in the United States. Since the $35 billion deal to combine Halliburton and Baker Hughes was announced last November, everything required to pull off a merger of this size and stature — the agreement, the shareholder votes, the completely unrelated layoffs from both companies — has been moving forward. However, there are some faint rumblings about the deal.

First, there's sign that maybe Wall Street traders know something we don't. Oilpro, an industry insider newsletter, noted in a recent article that Baker Hughes's stock has been "trading at a discount" to the Halliburton offer since January and the gap has continued to widen over the past few months. To put that into English, when two companies are going to combine, the stock for the company is put on sale so it's actually selling for less than the sticker price.

The discount is actually normal. So it's no surprise that the Baker Hughes stock is selling cheap, because, as the company that's essentially about to get gobbled, it's supposed to be a bargain right now. The thing is, as we get closer to the deal actually going through, the difference between what the stock is selling for and what it's actually worth should be getting smaller. Instead, in the case of Baker Hughes, the gap between what the stock is selling for and what it's actually worth has only been widening. As Oilpro notes "a widening in this spread is a sign investors see growing risk that the transaction will not be closed." Translation: Wall Street traders might be selling the stock cheap because they don't think the merger is going to happen. So that's not a good sign.

We already knew — because oil industry types who know these types of things called it — that Baker Hughes and Halliburton were a pair of companies likely to merge after oil prices began tumbling in June 2014 in a response to a glut of crude on the global market. The falling price of oil set the stage for large companies to start looking around to size up competition and see if it could be gobbled up. But officially, that wasn't how the Baker Hughes/Halliburton deal came together.

As we've previously reported, the idea that the two companies might combine had actually been circulating for a while. Then in January 2014, a single shareholder somehow convinced Halliburton CEO Dave Lesar he should think hard about such a deal, according to Securities and Exchange Commission filings. (We don't know who the lone shareholder was because the identity isn't in the filing, but we like to imagine a sort of Lone Ranger type.)

We also learned from the SEC filings that, cordial as the merger looked in public, a full two months before actually meeting with Baker Hughes honchos to discuss the deal, Lesar had Halliburton's Credit Suisse advisers looking at options for a hostile takeover. No matter how cuddly and joyous the executives from the two companies act about this thing in public, behind the scenes Halliburton was intent on combining with its longtime rival whether Baker Hughes was willing or not. Things ended up playing out in a much more friendly fashion for the two companies, but it definitely wasn't the only option. After the deal was announced, Halliburton shareholders voted to issue stocks to complete the $35 billion transaction and Baker Hughes shareholders voted to give the deal a thumbs up in March.

However, it isn't all puppies and kittens to get a deal of this size finished. The U.S. Department of Justice stepped in this spring asking for more details on how exactly the companies are going to get together without violating any anti-trust laws. The merger was always going to face some intense scrutiny from federal regulators because the two oil field services providers have some overlapping businesses in the United States, Asia and Europe.

In a move toward appeasing the federal government, Halliburton previously announced that the company would sell off about $7.5 billion worth of businesses to make the deal more palatable to regulators, but we won't know until the Department of Justice issues it's report whether that particular chunk of businesses will shift things around enough to ensure that, in its newly formed configuration as the second largest oil field services company in the world (behind Schlumberger), the company won't be too big. It's unclear when the federal government is going to issue that report, but it should be any day now, according to industry insiders. 

Halliburton and Baker Hughes could be stuck in the unenviable position of being sellers in a buyers market if the deal is approved to move forward and they start selling off the required assets, according to Ed Hirs, an energy economist and professor at the University of Houston. "The people buying these parts of the business know that the company has to sell so the buyers pretty much get to name their price on this," Hirs says. 

Maybe these could be looked at as signs that the merger isn't going to happen, as Oilpro reported. These signs could also be nothing at all of importance. Hirs says he's confident the merger will go through as planned later this year. On top of that, the extra oil on the market has still been driving the price down, which has led to cutbacks from oil producers who then have to cut how many rigs are in the various fields. The number of rigs in the United States hit a 12-year low in May. Less rigs means less for oil field service companies to do, so all the service companies are feeling this pinch, according to an analysis from Market Realist. 

So what does all of this actually mean? Well, so far the signs aren't clearly foretelling anything at all, but it could mean the merger of two companies is faltering. Maybe. 

We asked Baker Hughes spokeswoman Melanie Kania about this and she told us she can't comment on the merger, before politely directing us to the most recent public statement issued by Baker Hughes in April on the merger. "Regarding the planned combination with Halliburton, I am pleased with the progress to date including a positive stockholder vote received in the first quarter," Baker Hughes Chairman and CEO Martin Craighead stated in the release, before assuring everyone that the company intends to keep "working diligently" on oil stuff while also optimizing and innovating and doing all the things investors like a company to do while waiting on the merger. 

We asked Halliburton spokeswoman Emily Mir about her company's side of the deal, and she also referred us to Halliburton's public statements on the issue. Halliburton hasn't said much of anything, acquisition-wise, since announcing that stockholders signed off on the merger back in March. 

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