Halliburton’s takeover of Baker Hughes is setting out to be the oil and gas merger of the year. One of the largest such deals in years, it has not, however, met with unanimous approval. From antitrust concerns to management frictions and negative market forces, this has not been a smooth ride. And with a $3.5 billion break-up fee promised to Baker Hughes by Halliburton should the merger fall through, failure would come at a hefty price. Here are five reasons why the deal might still capsize.
1. Worldwide Regulatory Objections
Halliburton and Baker Hughes have not been model corporate citizens around the world. As reported by the Wall Street Journal, both companies have been fined by the Department of Justice and the Securities Exchange Commission for violating the Foreign Corrupt Practices Act. Baker Hughes was found guilty of making illegal payments to a slew of unsavory countries, including Russia, Nigeria, Angola, and Uzbekistan. Halliburton also broke the record for fines under this Act in 2009, shelling out $559 million to settle claims of bribing Nigerian officials. While, on paper, it may seem that the companies have paid their debt to society, regulators are unlikely to gloss over this troubled past. To prevent this, Halliburton has already volunteered to divest itself of $7.5 billion in assets while awaiting an official verdict by U.S. regulators. But once this is over, regulators in Europe and Asia may also seek to have a say.
2. Growth Is Not Guaranteed
Reports are divided on exactly when these talks got started. The WSJ suspects initial inquiries may have started as far back as 2007 while others think this was rushed through in the face of increased pressure from low oil prices. With a 30% drop in prices since June and with OPEC still refusing to commit to production cuts, it is conceivable that oil will soon be too cheap to profitably drill. This will lead to fewer drills being deployed and some being removed, depriving the likes of Halliburton and Baker Hughes of much-needed income. Their merger will certainly somewhat protect them and land the new Halliburton with a 23% market share in shale drilling. But despite the size of the deal, other global forces risk overwhelming any advantages drawn from it.
3. Unconvinced Stock Market
At the end of the day on Monday, Halliburton’s stock price was down 9.04% after an initial morning spike. Baker Hughes got walloped for 10.3% although this was mitigated by including a massive early morning leap. These figures are not those of fully trusted companies. Indeed, the deal has left investors with a number of concerns. Yahoo Finance reports that the 40% premium being paid for Baker Hughes, “a company that has been a consistent under-performer in the oil patch”, is surprising. Although Halliburton has offered to generously divest, some investors feel that the DOJ may spring at the oil giant’s goodwill to force it to get rid of even more. Worldwide, there is widespread belief that the oil price drop is yet to finish, potentially leaving Halliburton even more vulnerable. Combined, this is too much for investors that are already backing away from high-risk gambling in the crisis-ridden oil sector.
4. Stuck in the Number 2 Position
With a market capitalization of $122.6 billion, Schlumberger still outpunches the new gestalt entity as Halliburton is worth $47.65 billion and Baker Hughes weighs in at $26.6 billion. One of the main reasons Halliburton has given for its acquisition of Baker Hughes was to better compete with Schlumberger, the worldwide oil services leader. This will certainly be a successful move in the Americas, where Halliburton already leads. Worldwide, this is a different story. For example, Schlumberger is in a better place to capitalize on increased drilling in the Gulf of Mexico and its partnership with Anton Oilfield Services has cemented its place in China. The new and improved Halliburton will still have a lot of catching up to do.
5. Management Teams Don’t See Eye to Eye
Last Friday, after days of intense speculation surrounding the deal, Baker Hughes CEO Martin Craighead threw a spanner in the works by issuing a letter stating that his company might well be open to other bids, beyond Halliburton. This was interpreted in various ways but the most sensible reaction was that this was an eleventh-hour tactic to get Halliburton to raise its offer. Halliburton did not take kindly to this stonewalling and threatened a hostile takeover and to replace the entire Baker Hughes board. Over the weekend, things seem to have settled down and a buying price of $38 billion was announced on Monday. However, the integration of the operations of two oil services giants will require a lot of collaboration at the highest level and any lingering animosity will not help.
By Chris Dalby of Oilprice.com
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