Oilfield Services Merger of the Decade Nixed Amid Strong Opposition

Oilfield services giants Halliburton and Baker Hughes have called off an almost $26 billion merger amid strong opposition from US and EU anti-trust regulators who feared the deal would largely remove competition in the sector.

The U.S. Justice Department had taken legal action to block the merger of the two companies--which together represent the second and third largest in the oil services sector--for fear the combination would result in higher prices. In its turn, the EU’s executive arm had also voiced concern that the deal would have a negative impact on competition and innovation.

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If the merger had been achieved, it would have left only two supermajor oil service companies on the world market.

A merger deadline had been set for the end of April, with the failure forcing Halliburton to pay Baker Hughes a $3.5 billion termination fee.

The takeover was initially brought up in late 2014 in an attempt to better compete against market leader Schlumberger.

In a statement issued on Sunday, U.S. Attorney General Loretta Lynch hailed the decision to call off the merger. "The companies' decision to abandon this transaction – which would have left many oilfield service markets in the hands of a duopoly – is a victory for the U.S. economy and for all Americans”.

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In theory, it takes three strong competitors to make an efficient market. Without three competitors, industries and companies fall prey to problems of tacit collusion, resulting in a gradual increase in prices and lower overall economic efficiency.

While Halliburton showed a willingness to do whatever was necessary to get the deal done by agreeing to divest billions of dollars of assets, in the end it was not enough. The problem with the deal was the same problem that drove the need for the merger in the first place; low oil prices. But ultimately, the merger failed because of the absence of a third strong competitor in this sector.

By James Burgess of Oilprice.com

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