Halliburton and Baker Hughes broken marriage

On May 1, 2016, Halliburton and Baker Hughes, respectively the second and third largest oilfield services firms, have announced the abandonment of their planned $34.6bn merger because of opposition from US and European regulators.

Recap of acquisition’s drivers and structure of the deal

Throughout this deal, Halliburton aimed to broaden its product lines and increase services provided to its customers, mainly big oil producer companies. Moreover, the deal was supposed to produce cost synergies ($2bn every year) due to the increase of the scale in the overlapping segments. The company would have also benefitted from Baker Hughes’s presence in certain areas, such as Mexico and Russia.

In Baker Hughes’s perspective, the deal was sought to produce significant premiums to shareholders and providing them with 36% ownership in the combined company.The transaction equity value was of $34.6bn paid in cash and stocks. The breakup fee promised to Baker Hughes was of $3.5bn, approximately 10% of the total deal value.Announcements of the deal were made as early as November 2014 and, initially it was supposed to close by the end of 2015.
Credit Suisse and Bank of America Merrill Lynch were advising Halliburton whereas Goldman Sachs advised Baker Hughes.

Regulatory issues

The main concern about the deal was represented by possible authorities’ decisions which could have halted the acquisition. In particular, in April 2016, the US Justice Department filed an antitrust lawsuit against the Baker Hughes acquisition. The DOJ alleged that the deal would lead to higher prices and to a reduction of innovation in the oilfield services industry, eliminating head-to-head competition in more than 23 product markets. In particular, in 9 markets the combined company would have a share above 70%. The Assistant Attorney General Bill Baer significantly declared:” I have seen a lot of problematic mergers in my time. But I have never seen one that poses so many antitrust problems in so many markets”.

European Union regulators also investigated the acquisition, starting in January 2016, in order to understand whether the deal would reduce competition or increase prices in the exploration and production services in the EU. A final decision was supposed to be made by May 26, but the abandonment of the deal by the two companies eventually came before this date.

As a reaction to antitrust concerns, Halliburton and Baker Hughes decided to divest some assets, especially in the businesses where the competition would have been more limited as a consequence of the deal. In April 2016, Halliburton and Baker Hughes were in talks with the Private Equity firm Carlyle for the selling of a package of oilfield services businesses valued about $7bn. The two companies had hoped that this action would have been seen favourably by the Justice Department, as “it facilitates the entry of new competition in markets in which products and services are being divested”. However, the Department of Justice maintained its early opinion on the necessity to halt the acquisition and immediately afterwards the two companies announced the abandonment of the deal.

Consequences of the failed deal and market reaction

The main direct consequence of the failed deal is for Halliburton to pay the $3.5bn termination fee to Baker Hughes as stated in the Merger Agreement signed by the companies on November 2014. As we stated in the first article, this was the second biggest termination fee ever paid in any M&A transaction, representing nearly 10% of the total deal value (the average is usually 4%) and signalling the overconfidence of the two companies in overcoming the regulatory issues.

The market reaction to the announcement of the deal abandonment was singular. Halliburton shares rose during the announcement day while Baker Hughes showed a small decline.

Halliburton shares did not fall as investors may have already priced in the high probability of regulatory oppositions both from the US Department of Justice and the EU Antitrust Authority. Analysts and investors seems to have positively welcomed the end of this long lasting transaction. Even after the failed acquisition, Halliburton outlook seems favourable since it will continue its 25% costs reduction program, to boost margins and profitability. Moreover, the company has the cash resources to pay the huge termination fee without facing distress.

Considering Baker Hughes, the firm announced that the after-tax termination fee of $2.5bn will be used for a $1.5bn share buyback program and for the repayment of $1bn of debt. The aim of the buyback program is to partially compensate the shareholders for the lost premium they would have had if the merger went through. However, this use of the termination fees cash may have signalled to the market that the company has no attractive growth prospective or investment opportunities and therefore the market penalized its shares.

Sources and References: Bloomberg, Wall Street Journal, Financial Times, Companies’ websites, Houstonpress.com

To contact the authors:

Francesco Brambati                            francesco.brambati@studbocconi.it

Guglielmo De Martino                      guglielmo.demartino@studbocconi.it

Stefano Rovelli                                              stefano.rovelli@studbocconi.it