HAL-BHI Merger: Is No Action Better Than A Rejection?

One of the high-profile mergers in the oil and gas industry – the proposed merger between Halliburton and Baker Hughes – is in trouble yet again, as the US Department of Justice (DOJ) decided, last week, to neither approve the deal nor block it using litigation. Since the union of the No. 2 and the No. 3 players in the oilfield services industry can drastically alter the landscape of the industry, the DOJ concluded that the remedial divestitures proposed by the two companies were not sufficient to obtain a regulatory approval for the deal. However, the antitrust department has not out-right rejected the merger and has assured that it will continue to cooperate with the two companies and evaluate further proposals for the deal. Consequently, the deadline to obtain regulatory clearance for the deal has been extended to 30 April 2016 ^[1].

See Our Complete Analysis For Baker Hughes Here

Interestingly, the investor reaction to the news has been mixed. Halliburton’s stock went up by 1.5% on the day of the DOJ decision, while Baker Hughes stock ended the day slightly lower (Source: Google Finance). Based on this initial reaction, one could believe that the market is considering the DOJ’s no action to be good for the two companies as well as the merger. That is to say, since the antitrust agency did not reject the merger absolutely, there is still a good chance that the deal will receive regulatory approvals through further divestitures in 2016. However, according to a contrarian view, antitrust agencies in the US, Europe, Australia, and Brazil are concerned that the absence of a strong No. 4 player that can take the No. 3 slot post this merger will stifle competition in the oilfield services industry. This could prove to be detrimental for the customers particularly in this period of prevailing depressed commodity prices. Consequently, the market is factoring in a downside for both the companies due to fears of the deal failing due to regulatory issues. This view is supported by the fact that the stock of the two companies began declining in the days following the news, highlighting that the investors worry whether the deal will pass through even in the next year. Halliburton has plunged almost 9% since DOJ’s announcement, while Baker Hughes has seen a 6% dip in its price over the last week.

Source: Google Finance

In our view, if Halliburton and Baker Hughes are willing to operate as a single entity, they will have to divest a significant portion of their assets in their overlapping markets to obtain a go ahead from the regulatory authorities. While it is difficult to judge the impact of these asset sales, we figure that these are likely to reduce the $2 billion of cost synergies that the two oilfield contractors are expecting to realize from the deal. As a result, the upside that the merger could bring to the combined entity would be lower than anticipated. On the contrary, if the deal does not pass through due to failure to obtain a go ahead from the regulatory authorities, Halliburton will be obligated to pay a sum of $3.5 billion to the shareholders of Baker Hughes. Since this penalty is equivalent to almost 10-12% of Halliburton’s market capitalization, it will have a huge downside for the company. In addition, the company had a cash balance of $2.25 billion at the end of the third quarter. This means that the oilfield major will have to use a part of its newly issued debt to pay the penalty to Baker Hughes shareholders, which will further burden the company’s balance sheet. For Baker Hughes, although the penalty payment will be a boost for the company’s shareholders in the short term, we think that with the deteriorating financial position, the company will have a tough time ahead if the current commodity down cycle prevails for long.

For More Details, Read:

• Schlumberger-Cameron Deal Versus Halliburton-Baker Hughes Merger – Part 2
• Schlumberger-Cameron Deal Versus Halliburton-Baker Hughes Merger – Part 1
• Schlumberger To Buy Cameron, Gets A Better Price Than Halliburton-Baker Hughes Deal
• Halliburton-Baker Hughes Merger In Trouble Again?
• Will Halliburton’s Proactiveness Work In Its Favor?
• Why The Baker Hughes Deal Will Eventually Create Value For Halliburton Shareholders?
• Why Halliburton Is Buying Baker Hughes?

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Halliburton and Baker Hughes Provide Update Regarding DOJ Review, 15th December 2015, www.bakerhughes.com [↩]