Perhaps the biggest single change for the oil business since the start of the slump is Halliburton’s deal to buy Baker Hughes. The mega-merger would radically alter the oil field servicing industry leaving two giants competing and a couple of smaller firms vying to take BHI’s spot as the new number three.
The prospect of a change of this magnitude in the oil servicing space is particularly significant as the American oil industry has done more to disrupt the oil business than anyone else in the last century. Baker Hughes, Schlumberger, and Halliburton are all critically important cogs in the shale oil machine. And all of this has the Department of Justice worried.
The DOJ’s job is to deter monopoly largely by pushing back against mergers that have the potential to unfairly influence the level of competition in the market place. Bloomberg reported recently that DOJ is putting up some resistance to the merger along exactly these lines.
Now the truth of the matter is that major firms that merge almost always end up being forced by the DOJ to divest a series of assets. These forced asset sales can create big opportunities for the smaller players in the market to grow larger. Divisions that a joint BHI-HAL have to sell are not going to be salable to the other main competitor here, Schlumberger.
Instead those assets are likely going to be sold to the likes of Weatherford, National Oilwell Varco, and Frank’s International. Analysts believe that the Baker Hughes-Halliburton deal will ultimately close, and are not worried about the Bloomberg report.
Though the combined BHI-HAL have agreed to sell $7.5B in assets, the DOJ may not be convinced this is enough. The DOJ has substantial powers to make the lives of executives and shareholders at both companies miserable. In particular, under the Clayton Act, mergers and acquisitions that are likely to reduce competition are prohibited. The DOJ enforces this act and could sue the firm’s to stop the merger.
The DOJ’s power is real and companies frequently roll over and abandon a merger attempt in the face of DOJ litigation. The Comcast-TWC deal earlier this year fell apart for that very reason.
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There is no doubt that the DOJ is concerned about the case. That said, it is also probable that the combined company could satisfy the DOJ’s concerns if it continued to offer up asset blocks to sell-off. Given the current start of the oil markets and the enormous supply chain deflation going on right now, the two companies could likely make a strong case that their prices are really driven by the market and commodity price conditions rather than by anything they do as corporations.
Further, even if the DOJ did decide to litigate, Baker Hughes and Halliburton both have an incentive to fight in court. Both firms know that the floor has dropped out from under the oil market and that their respective stock prices are being held aloft by merger related hopes on the part of investors and analysts. If the deal were to disintegrate, both stocks would probably drop a minimum of 10%, and likely more. In addition, Halliburton would owe Baker Hughes a break-up fee equal to 10% of the value of the deal.
This would mean a payment from Halliburton of roughly $3.5 billion. Given the size of that cost and the potential for synergy cost cutting, it’s easy to imagine Halliburton expending every resource it can in a full measure of devotion to the deal. Shareholders bailing at this stage and assuming the deal is lost are likely to forgo a significant profit eventually.