Two of the world’s leading oilfield service companies, Halliburton and Baker Hughes, are merging in a deal reportedly worth $34.6 billion. The deal has only recently been announced and is expected to close in the latter half of 2015. Halliburton and Baker Hughes are the second and third largest oilfield service companies respectively. If the merger is successful, the resulting company could then be in a position to challenge the market leader Schlumberger which currently has a sizable profit margin over the two merging companies.
So firstly, why is Halliburton taking over Baker Hughes? The answer seems obvious, to challenge Schlumberger, however their reasoning does extend deeper than this. Halliburton and Baker Hughes have very similar geographical footprints – that is, they work in very similar markets. Both companies derive almost half their revenue from North American alone. The merger will not only remove one of Halliburton’s main rivals but it will also result in significant improvement in cost synergy. Halliburton has estimated a saving of $2 billion by optimising their corporate and administrative costs alongside those of Baker Hughes. Furthermore, the merger will allow Halliburton to increase its presence in markets such as Canada and Russia where Baker Hughes have a much larger market share. Branching out into new markets is a key strategy for oilfield services as the hunt for oil becomes more expensive and arduous.
The second question, why is Baker Hughes accepting the takeover, is slightly trickier to explain. An initial explanation does present itself though – Baker Hughes’ revenue is lagging behind that of Halliburton’s and with oil becoming even scarcer, consolidation of competition could be the best move for Baker Hughes’ shareholders. Additionally, Baker Hughes’ shareholders are estimated to receive 1.12 Halliburton shares and £19 for every share they hold. This certainly seems a favourable deal – a lump cash sum and more shares in a, likely, more successful company must be hard to turn down.
The deal will inevitably face some heavy complications; this is to be expected given the two companies are the second and third largest in their industry. Both businesses are competitors, they work along the same product lines and as such, combining their market share is highly likely to clash with competition regulation. The newly formed company would hold 36% of the pressure pumping market, 48% of the completions equipment and services market and 49% of the market for cementing services. Halliburton claims it will placate the competition regulations by selling off parts of the business. The pressure is certainly on Halliburton, the company has promised to pay Baker Hughes a $3.5 billion fee if the merger falls through because of competition regulation.
The American based law firms Baker Botts and Wachtell, Lipton, Rosen and Katz are advising Halliburton on the deal whilst Davis Polk & Wardwell and Wilmerhale are advising Baker Hughes. Baker Botts is not a surprising choice for Halliburton having represented the company on numerous deals since 2002, and on a deal of this size and importance it is highly common to employ two different law firms. Davis Polk & Wardwell is a slightly more surprising choice for Baker Hughes since they have usually worked alongside Akin Gump Strauss Hauer & Feld, another large American based firm. One reason for turning to Davis Polk & Wardwell could be because, whilst having fewer offices, they cover more of the international stage with regards to their office locations. On a deal such as this, this could prove crucial since both companies span multiple jurisdictions.