If Dave Lesar was nervous, he wasn’t showing it. The chairman and CEO of Halliburton Co. was on CNBC stating, matter-of-factly, how confident he was that regulators would let his company merge with its giant rival, Baker Hughes Inc.
"We have the best antitrust counsel out there. We have studied this thing to death, as you can imagine," he said Nov. 18, 2014, the morning after the $34.6 billion deal was announced. "We would not have done this deal if I didn’t believe we would get it through the regulatory bodies."
The confidence may have puzzled some. The deal was all but certain to face a tough antitrust review, since it would fuse the world’s Big Three oil field service firms — Schlumberger Ltd., Halliburton and Baker Hughes — into the Big Two. And if regulators blocked it, Halliburton would have to cut a $3.5 billion check to Baker Hughes, one of the largest "breakup fees" of its kind in history.
Why — and how — could anyone be so sure?
Antitrust experts consulted by EnergyWire said Halliburton’s confidence is well-founded. For one, Halliburton has done plenty of spadework to increase its chances of success.
But beyond that, they said, U.S. antitrust authorities have become more open to mega-mergers in recent decades. Rather than blocking deals, they tend to permit them as long as the companies sell off business lines afterward.
"If there’s a way to cure [the merger] without killing it, they’re likely to do that," said Darren Bush, a professor at the University of Houston’s Law Center. "My bet on Halliburton is, I think they’ll be nickeled and dimed, and then they’ll get their merger. There’ll be some token divestitures, and that’s what the DOJ calls a win nowadays."
The Department of Justice yesterday finished the first part of its antitrust review, and it has asked the companies for more information to continue its study. Halliburton hopes to complete the process by the end of the year.
"Oil services" refers to a wide variety of jobs and goods that help energy producers in their pursuit of oil and gas. A service provider could be called on to blast water at rock, build a drill bit, explore an area for oil, deliver sand or cement a well.
But in an oil service industry with thousands of companies, the Big Three enjoy an unrivaled size and scope.
Last year, they alone accounted for more than a fifth of all upstream service business worldwide, according to Rystad Energy. In the booming market of North America, they hold a third of all frac service capacity, according to PacWest Consulting Partners.
By absorbing Baker Hughes’ empire, Halliburton means to get bigger and leaner.
The merger would drive "cost synergies" of nearly $2 billion a year, the company claims. Nearly a third of that would come from North America, where the company would nearly double in scale (EnergyWire, Nov. 18, 2014).
Analysts believe the long-term goal is to take a real run at "Big Blue": Schlumberger, the world’s largest service firm at $108 billion. Halliburton, second-largest, has a market capitalization closer to $36 billion.
Now, regulators will have to ask whether what’s good for Halliburton is damaging to the market.
That will be the object of exhaustive formal study by DOJ. But Allen Gilmer, chairman, CEO and co-founder of analytics firm DrillingInfo Inc., said he sees reason for concern.
"The thing that’s interesting is for Halliburton and Baker Hughes, those were the two that would price compete. No one price competed with Schlumberger," he said. "The two that were price competing are now going to combine, and I can’t help but think that has an impact on price competitiveness."
As the "Cadillac brand" of oil services, Schlumberger can charge higher prices, Gilmer said.
David Anderson, an analyst with Barclays Capital, joined many Wall Street analysts in predicting the deal would succeed. But it would create "essentially insurmountable barriers to entry" for any other company aspiring to become an industry "major" like them, he wrote last month.
Incredibly, in the near term, the deal might even benefit Schlumberger. Last month, CEO Paal Kibsgaard seemed to say as much, saying Big Blue could snatch up more global business while its rivals were busy merging (EnergyWire, Jan. 20).
These points show why, last fall, antitrust concerns were a major point of tension between Halliburton and Baker Hughes.
Regulatory filings show an animated and increasingly testy correspondence between the companies’ top brass, including Lesar and Baker Hughes’ Chairman and CEO, Martin Craighead.
As the correspondence shows, Halliburton believed it had offered a premium deal and wanted to reach an agreement as quickly as possible. But Baker Hughes’ board saw significant antitrust risk, and it demanded concessions from the Halliburton side (EnergyWire, Dec. 23, 2014).
After weeks of tug-of-war, they arrived at a compromise. Halliburton would grease the deal by showing regulators up to $7.5 billion worth of businesses it was willing to divest.
And if the deal fell through for antitrust reasons, Halliburton would cut a check to Baker Hughes for $3.5 billion.
At roughly 10 percent of the total deal value, this would rank among the highest "reverse termination fees" in history. For reference, a study by Shearman & Sterling LLP looked at 760 deals over the last decade, finding that only half had breakup fees of more than 4.3 percent.
Halliburton believes that won’t happen.
According to the filings, it’s been preparing the economic, market and legal homework for the merger since September — nearly two months before striking the deal with Baker Hughes.
And the companies’ antitrust lawyers are considered top-shelf: On the Baker Hughes side, Molly Boast of WilmerHale served for two years at DOJ’s Antitrust Division and even helped write its 2010 handbook on horizontal mergers.
Size has its advantages
They will guide the companies through a DOJ process where size is a red flag, but not a deal-breaker.
"The thing about oil field services is it’s not one thing. It’s actually many, many things," said Michael Noel, an economics professor at Texas Tech University. "The DOJ looks at every one of those things and looks at areas in which they’re more concentrated and less concentrated."
But a high concentration isn’t automatically considered a problem, Noel said, echoing the views of many others.
Instead, it will force a deeper analysis. By looking at a unique market — say, drill bits in U.S. onshore — regulators can decide whether the merger would harm competition. If so, they’ll push for divestments to compensate for that and move on to another segment.
The idea is to restore some of the competitive distortions that come with having two top dogs in an industry. But regulators could also decide that no level of divestment would get there.
"Justice will look at this very carefully. They might conclude that there’s no deal that’s a good deal," said a former U.S. antitrust official, who asked not to be identified in order to speak freely.
But given the direction of antitrust regulation in recent decades, experts said, that outcome would be quite unusual, as the authorities have become more permissive.
One reason is that economists began to conclude that larger firms weren’t necessarily a bad thing. With scale and size, certain benefits could be realized — many of which would be obvious to a consumer in 2015.
In the 1930s, some argued against the idea of supermarkets, said Noel of Texas Tech. But few people today would prefer to go separately to the butcher, baker and milkman — and pay higher prices to boot, he said.
"Sometimes having a handful of very big firms is more efficient and results in lower prices than having lots and lots and lots of small, inefficient firms," he said. "And that’s why you have supermarkets today and why you have Wal-Mart today."
But Diana Moss of the American Antitrust Institute said this kind of thinking has gone too far and given consumers the short end of the stick.
She pointed to the U.S. broadband industry, which she said is one of the least competitive in the world.
"Given the size and implications, we’d hope the DOJ would take a very aggressive stance on this," she said, referring to the Halliburton-Baker Hughes merger. "I don’t see this as a slam-dunk deal."
And in the longer run of American business, well after the Halliburton-Baker Hughes saga ends, a change in approach may be in store.
Last month, the Federal Trade Commission, the other antitrust authority in the United States, said it will review its policy of allowing mergers with divestitures and other "remedies" — to see what it achieved.