Halliburton-Baker Hughes merger blocked by DOJ lawsuit

By Kasia Patel
Published: Monday, 25 April 2016

Takeover “risky, piecemeal and vague” Too many overlaps and competition issues Halliburton and Baker Hughes plan appeal

The US Department of Justice (DOJ) filed a civil antitrust lawsuit in April seeking to block Halliburton Co.’s proposed takeover of Baker Hughes Inc., saying that the transaction could eliminate competition, raise prices and threaten innovation in oilfield services.

During a media call discussing the reasons behind the lawsuit, Bill Baer, the Assistant Attorney General for the DOJ’s Antitrust Division, said that he had never seen a merger with as many antitrust problems as the one proposed by Halliburton and Baker Hughes, adding that the breadth and scope of competitive overlaps and issues it presents was unprecedented.

Halliburton, the world’s second largest oilfield services provider, announced its intention to pursue the acquisition of Baker Hughes, the third largest oilfield services provider, at the end of 2014, and has since been working with antitrust authorities globally, including the DOJ, to gain approval for the merger.

The companies provide drilling and exploration services, as well as completion and production support and products. Both are additionally leading producers and providers of oilfield minerals including barite (barytes) and bentonite.

Halliburton and Baker Hughes have offered a number of different divestment proposals to alleviate DOJ concerns over anti-competitiveness.

As part of its proposals, Halliburton said it would divest its expandable liner hangers business, part of its completion and production division, after previously announced divestitures – fixed cutter and roller cone drill bits, directional drilling and logging-while-drilling (LWD)/measurement-while-drilling (MWD) – were not adequate.

Baker Hughes, meanwhile, said it planned to divest its core completions business, which comprises packers, flow control tools, subsurface safety systems, intelligent well systems, permanent monitoring, sand control tools and control screens.

Divestments proposals appease no one

According to US Attorney General Loretta Lynch, however, the takeover proposal by the two companies diminishes competition in 23 products or services essential to energy production, reducing supply for many customers in the oilfield sector to a duogarchy.

"Halliburton and Baker Hughes’ proposals for divestiture fail to address our concerns, the transaction is risky and complicated and puts too many markets at risk," Lynch said during the conference call.

During the conference, both Lynch and Baer described the proposal as risky, complicated and piecemeal with both companies failing to offer any specifics on the proposed divestments.

According to the DOJ, the businesses to be sold off by Halliburton would retain the more valuable assets from either company, only selling off less significant assets to one or more third parties, failing to recreate the substantial competition that currently exists between the two rivals.

Baer noted that over 90% of Halliburton’s revenues come from products also sold by Baker Hughes, while Baker Hughes competes with Halliburton for 90% of its revenue. And, together with the largest US oilfield services provider Schlumberger Ltd., the two companies would account forover 90% of supply in some US sectors should a merger go ahead.

"Our lawsuit should surprise no one, least of all these two companies," Baer said, adding that both were aware of the risky nature of the venture and went forward regardless. "We have made the decision they knew we were leaning towards."

While the DOJ took into account the current situation in the oilfield sector, where low prices and oversupply have led to a huge y-o-y drop in drilling activity and a subsequent drop in demand for oilfield services demand, Baer noted the cyclical nature of the industry adding that low activity was not an excuse for anticompetitive measures.

Eliminating the competition

The DOJ also expressed concerns that a merger would reduce innovation in the oilfield services industry, saying that healthy competition between Halliburton, Baker Hughes and Schlumberger propelled the development of more efficient drilling methods and kept US energy prices low.

"Halliburton and Baker Hughes are two of the three largest integrated oilfield service companies across the globe, and they compete to invent and sell products and services that are critical to energy exploration and production.  We need to maintain meaningful competition in this important sector of our economy," Baer said.

The transaction, Baer explained, would effectively eliminate Baker Hughes as a formidable competitor and replace it with a much weaker company, not only in the US but in terms of competition internationally.

In addition to working with the DOJ, Halliburton and Baker Hughes have also been attempting to appease European and Brazilian antitrust authorities. While the DOJ said it did not know what decisions other jurisdictions would take, Baer said the authorities had been working together, hinting that a similar decision could be forthcoming.

Despite receiving unconditional clearance in Canada, Kazakhstan, South Africa and Turkey, the acquisition has yet to receive approval from any competition authority, including the European Commission, which in January opened an in-depth investigation into the deal.

Fighting back

While no one at Baker Hughes or Halliburton was immediately available to speak to IM, the companies said in a joint statement that they plan to "vigorously contest the DOJ’s effort to block their pending merger".

"The proposed merger of Halliburton and Baker Hughes is pro-competitive and will allow the companies’ customers to benefit from a more flexible, innovative and efficient oilfield services company. The transaction will provide customers with access to high quality and more efficient products and services, and an opportunity to reduce their cost per barrel of oil equivalent," the statement said.

Halliburton and Baker Hughes once again emphasised their proposed divestments, describing them as sufficient to address the DOJ’s competitive concerns, and said they plan to demonstrate the DOJ underestimated the highly competitive nature of the oilfield services sector.

"Halliburton and Baker Hughes look forward to a full, impartial judicial review of the pending transaction, including the sufficiency of the proposed divestitures," they said.

Responding to the news that the companies would contest the decision, Baer said they were entitled to do so and that the DOJ "will join issue on that in court", which will reinforce the message that anticompetitive measures would not be accepted.

"There are some deals that are so risky and anticompetitive that they should never have made it out of the boardroom," Baer said. "This falls squarely in that category."