When the number two in the market makes the decision to buy one of its chief rivals for $34.6 billion the whole industry holds its collective breath and starts to consider the implications of such a massive deal. This deal is the largest takeover of a US energy company for 3 years and the seriousness with which Halliburton is taking this deal is best reflected by the steps it has taken to tackle concerns about any regulatory or monopoly concerns over the deal.
By buying Baker Hughes Halliburton eliminates a chief rival and expands its business portfolio and reach at a time when falling oil prices have pushed the industry into a downturn. The merger will likely draw intense antitrust scrutiny, especially where North America’s businesses overlap.
To try and head off problems in this area Halliburton has agreed to sell businesses that account for as much as $7.5 billion of revenue, should regulators demand it. The company has said it expects the required divestitures will be significantly less. Even so, traders are hedging the regulatory risk, leaving a wide gap between Baker Hughes’s share price and the value of the cash-and-stock offer. At the close in New York last Monday the spread was about 14 percent Baker Hughes climbed 8.9% $65.23.
Market reaction so far has been mixed. Those who support the deal point out that although Halliburton may not see a short term upside from the deal, it should gain over the long run, as it will be able to expand its suite of products and services and broaden its geographic reach while realizing significant cost synergies. Together, the companies will dominate the $25 billion U.S. market for onshore fracking and the merger also gives Halliburton access to Bakers Hughes technology to boost production in aging wells and its prized oil tools business.
The sharp drop in Halliburton’s share price was very likely due to a belief among investors that the company overpaid, the deal will never pass regulatory scrutiny — or even if the deal makes it past regulators Halliburton will have to divest some assets — or if Halliburton has to pay the $3.5 billion break-up fee that will be a downer for the stock. These same reasons are also dampening enthusiasm for Baker Hughes’ stock.
If the regulatory hurdles can be overcome then the oil business maxim “bigger is always better” seems to hold sway after all it is impossible to imagine that Exxon Mobil or Chevron will disappear in the next few years due to lower crude prices. It is not so hard to imagine that there are any number of smaller producers and services companies that will struggle as capital spending has to be cut back so that they can continue to pay dividends to keep stockholders happy.
The majority of market observers and analysts see the deal as a good and necessary one for both Halliburton and Baker Hughes because it:
- will bring $2 billion in synergy savings.
- establishes (on a pro-forma basis) a combined company that had 2013 revenue of $51.8bn, more than Schlumberger’s $45.3bn
- can resolve the regulatory barriers satisfactorily
Those in the minority don’t believe the synergies are as large, or the regulatory hurdles are surmountable and they question whether this will be a good deal if oil prices fall further. One thing everyone agrees on is that this deal will be tough to pull off.
