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5 Reasons The Halliburton-Baker Hughes Deal Is Poisoned

Tyler Durden's picture




 

Submitted by Chris Dalby via OilPrice.com,

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.

 

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Thu, 11/20/2014 - 15:25 | 5470645 assistedliving
assistedliving's picture

"threatened...to replace the entire Baker Hughes board"

now stand at attention and salute you walking POS's

Thu, 11/20/2014 - 15:25 | 5470647 Seize Mars
Seize Mars's picture

Two entities, both of whom exist to take my money by coercion, arguing over which one will get the money in my pocket. I might as well listen to those two assholes argue over herbal-fucking-life.
Yawn.

Thu, 11/20/2014 - 15:27 | 5470655 kaiserhoff
kaiserhoff's picture

Wrong.

Halliburton has a  "special relationship"  with the government, as did Bechtel before them.

This will be a cake walk.

Thu, 11/20/2014 - 15:50 | 5470740 NoDebt
NoDebt's picture

I think that's right.  Plus, when you have Schlumberger sitting on top in the #1 position (and still would be), a merger of #2 & #3 doesn't draw quite the attention it would if the merger would catapult the combined entity into the top spot.

Thu, 11/20/2014 - 16:02 | 5470784 KnuckleDragger-X
KnuckleDragger-X's picture

The problem with Schlumberger is they actually compete and this confuses Halliburton badly.

Thu, 11/20/2014 - 16:11 | 5470815 lakecity55
lakecity55's picture

You bet. Their relationship has no party differences within the USG.

Thu, 11/20/2014 - 15:27 | 5470656 madbraz
madbraz's picture

let me guess...breakup fee divided between upper management of both companies...duhhh

Thu, 11/20/2014 - 15:29 | 5470661 linniepar
linniepar's picture

Die Dick die!

Thu, 11/20/2014 - 15:29 | 5470665 pods
pods's picture

Halliburton IS poison, how can they not poison any deal?

pods

 

Thu, 11/20/2014 - 15:33 | 5470675 krispkritter
krispkritter's picture

Last time I heard Haliburton was buying a company was a couple weeks before the Deepwater Horizon disaster and the company was Boots and Coots.  B&C was probably the world's best well-capping operation, responsible for capping some 700 wells in Kuwait.  A couple weeks after the buyout we had one of the largest oil spills in history in B&C's backyard and I don't recall a single mention of B&C being used. And Haliburton was a contractor on that rig and shared partial responsibility. Now when I hear of Haliburton involved in a deal like this, I start to cringe at the possible side-effects or consequences.

Thu, 11/20/2014 - 16:09 | 5470808 lakecity55
lakecity55's picture

"MR Big, this discovery alone in tech can get our cost down to 10$ a barrel."
"Good, with that $$ we can get another guy connected to Texas in the hut"

Thu, 11/20/2014 - 15:38 | 5470695 medium giraffe
medium giraffe's picture

Well, if there was ever a group of people who deserve a good poisoning...

Thu, 11/20/2014 - 15:43 | 5470710 Budd aka Sidewinder
Budd aka Sidewinder's picture

From a conversation I had with a very very senior exec at an oil giant and a nimble independent guy down in South TX

'We can make money at $25 a barrel'

These guys are still cleaning up at $80....even if it drops to $50 they're making it big

Don't listen to the bullshit of them trying to push it back over $100

I'm sick and tired of these guys using the world politics of oil to flip their companies back and forth to each other and making themselves billionaires.

They don't work harder or aren't any smarter than anybody else.

Thu, 11/20/2014 - 19:21 | 5471548 Escrava Isaura
Escrava Isaura's picture

 

 

Not every oil well is made the same. Maybe a small operator in Texas, with some good wells, can turn some profit at $25. Not many!

 

Thu, 11/20/2014 - 15:48 | 5470725 Squid Viscous
Squid Viscous's picture

and the number one reason why it won't "capsize" GS is leading the deal, they don't like to lose 

Thu, 11/20/2014 - 16:58 | 5471018 limacon
limacon's picture

You might want to look into a similar deal in about 1913 when the canny Nobel brothers sold all their Caspian and black sea oil interests to Shell before th Russian Revolution .

 

You are about 3 times richer than you think .

See

https://www.academia.edu/9405720/The_Economics_of_Disrespect_Update_I

or

http://andreswhy.blogspot.com/2014/11/the-economics-of-disrespect-update...

Thu, 11/20/2014 - 20:18 | 5471721 Lostinfortwalton
Lostinfortwalton's picture

If the government let Boeing buy McDonnell-Douglas and reduce the number of US commercial airline makers to one, they are not going to lift a finger here.

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