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Halliburton and Baker Hughes Call Off $35 Billion Merger Halliburton and Baker Hughes Call Off $35 Billion Merger
(about 3 hours later)
For a year and a half, Halliburton and Baker Hughes, two big oil field services companies, had been focused on their $35 billion merger. That distraction, even as commodity prices deteriorated and their peers cut costs to survive, is finally over.For a year and a half, Halliburton and Baker Hughes, two big oil field services companies, had been focused on their $35 billion merger. That distraction, even as commodity prices deteriorated and their peers cut costs to survive, is finally over.
The two companies announced in a statement on Sunday that they had decided to terminate their merger. The news came after an excruciatingly long regulatory review process that culminated in a lawsuit last month by the Justice Department to block the deal on antitrust grounds.The two companies announced in a statement on Sunday that they had decided to terminate their merger. The news came after an excruciatingly long regulatory review process that culminated in a lawsuit last month by the Justice Department to block the deal on antitrust grounds.
“While both companies expected the proposed merger to result in compelling benefits to shareholders, customers and other stakeholders, challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” said Dave Lesar, chairman and chief executive of Halliburton, in Sunday’s statement.“While both companies expected the proposed merger to result in compelling benefits to shareholders, customers and other stakeholders, challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” said Dave Lesar, chairman and chief executive of Halliburton, in Sunday’s statement.
The deal was one that raised eyebrows from the start on whether it would get past regulators. The two companies were seeking to band together to compete with the likes of Schlumberger, and, in the meantime, to erase billions in costs related to operations and research and development. Things changed drastically soon after the deal was signed in November 2014. Oil prices sank to their lowest levels in years, a burden that has affected the entire industry.The deal was one that raised eyebrows from the start on whether it would get past regulators. The two companies were seeking to band together to compete with the likes of Schlumberger, and, in the meantime, to erase billions in costs related to operations and research and development. Things changed drastically soon after the deal was signed in November 2014. Oil prices sank to their lowest levels in years, a burden that has affected the entire industry.
Sales of assets, which were necessary to appease regulators’ concerns that the combination was just too big, suddenly became more challenged. Would-be buyers turned inward to manage their own business during the downturn, and private equity stayed on the sidelines.Sales of assets, which were necessary to appease regulators’ concerns that the combination was just too big, suddenly became more challenged. Would-be buyers turned inward to manage their own business during the downturn, and private equity stayed on the sidelines.
With the companies’ inability to shrink, the Justice Department sued in April to block the deal, saying it would “eliminate vital competition, skew energy markets and harm American consumers.” That left the companies with little will to fight.With the companies’ inability to shrink, the Justice Department sued in April to block the deal, saying it would “eliminate vital competition, skew energy markets and harm American consumers.” That left the companies with little will to fight.
“What Halliburton may have miscalculated here is the severity of the downturn and certainly the appetite of the Department of Justice to flex its muscles in a large corporate merger,” said Matt Marietta, an analyst at Stephens Inc.“What Halliburton may have miscalculated here is the severity of the downturn and certainly the appetite of the Department of Justice to flex its muscles in a large corporate merger,” said Matt Marietta, an analyst at Stephens Inc.
As compensation for the breakup, Halliburton agreed to pay Baker Hughes $3.5 billion by May 4, according to Sunday’s statement. It is a lofty price, especially when cash flow is tight in the energy industry.As compensation for the breakup, Halliburton agreed to pay Baker Hughes $3.5 billion by May 4, according to Sunday’s statement. It is a lofty price, especially when cash flow is tight in the energy industry.
That high fee was necessary because the deal almost did not happen two years ago. The two companies struggled initially, in the fall of 2014, to find a suitable price and breakup fee. But then, Halliburton threatened to turn over Baker Hughes’s board to restart discussions. The plan worked, with Halliburton raising its bid and agreeing to a larger-than-average fee if the deal were to fail to win regulatory approval. At the time, the fee was a symbolic commitment from Halliburton to do whatever it took to make sure the deal cleared the Justice Department.That high fee was necessary because the deal almost did not happen two years ago. The two companies struggled initially, in the fall of 2014, to find a suitable price and breakup fee. But then, Halliburton threatened to turn over Baker Hughes’s board to restart discussions. The plan worked, with Halliburton raising its bid and agreeing to a larger-than-average fee if the deal were to fail to win regulatory approval. At the time, the fee was a symbolic commitment from Halliburton to do whatever it took to make sure the deal cleared the Justice Department.
As stand-alone companies, though, analysts say both Halliburton and Baker Hughes should be able to survive. Halliburton has about $10 billion of cash on its balance sheet that it could use toward the breakup fee or potentially other transactions, according to data by S&P Capital IQ.As stand-alone companies, though, analysts say both Halliburton and Baker Hughes should be able to survive. Halliburton has about $10 billion of cash on its balance sheet that it could use toward the breakup fee or potentially other transactions, according to data by S&P Capital IQ.
“I don’t see a risk of either of the companies being bankruptcy risks,” Mr. Marietta said. “I think both companies are well positioned to manage through the downturn.”“I don’t see a risk of either of the companies being bankruptcy risks,” Mr. Marietta said. “I think both companies are well positioned to manage through the downturn.”
Shares of both companies have surged about 20 percent each since the Justice Department’s lawsuit was disclosed on April 6. For many investors, the lawsuit was a way of dissipating the cloud of uncertainty that had covered the deal for 18 months.Shares of both companies have surged about 20 percent each since the Justice Department’s lawsuit was disclosed on April 6. For many investors, the lawsuit was a way of dissipating the cloud of uncertainty that had covered the deal for 18 months.
The move by the Justice Department was the latest tough stance from an administration that has been seen as taking more aggressive actions against large deals. The previous one was Pfizer’s attempted $152 billion merger with Allergan, which was terminated after the Treasury Department came out with new tax-related rules that eliminated many of the benefits of the deal.The move by the Justice Department was the latest tough stance from an administration that has been seen as taking more aggressive actions against large deals. The previous one was Pfizer’s attempted $152 billion merger with Allergan, which was terminated after the Treasury Department came out with new tax-related rules that eliminated many of the benefits of the deal.
The European Commission, the European Union’s executive body, also raised concerns about the Halliburton-Baker Hughes deal.
“The transaction raised competition concerns on a very large number of markets related to oil field services provided to oil and gas exploration and production companies” in Europe, Margrethe Vestager, the European Union competition commissioner, said in a statement.
She said that “a number of customers contacted us to raise issues with the proposed transaction.”
The date by which Halliburton and Baker Hughes would have to decide whether to continue on their path of regulatory approval or terminate their merger agreement was extended to April 30. As a result, Halliburton postponed its earnings call to Tuesday, which many analysts assumed was done to discuss the deal.The date by which Halliburton and Baker Hughes would have to decide whether to continue on their path of regulatory approval or terminate their merger agreement was extended to April 30. As a result, Halliburton postponed its earnings call to Tuesday, which many analysts assumed was done to discuss the deal.
Since the downturn started at the end of 2014, Halliburton has reduced its head count by about a third, the company said in its April 22 earnings statement. The company also said it would reduce the infrastructure that it had kept in anticipation of a deal with Baker Hughes. Both companies have experienced significant slumps in revenue and reduced rig counts over the year.Since the downturn started at the end of 2014, Halliburton has reduced its head count by about a third, the company said in its April 22 earnings statement. The company also said it would reduce the infrastructure that it had kept in anticipation of a deal with Baker Hughes. Both companies have experienced significant slumps in revenue and reduced rig counts over the year.