By Brent Kendall, Lynn Cook and Alison Sider
Oil-field services rivals Halliburton Co. and Baker Hughes Inc.
could face a long, challenging effort to obtain antitrust clearance
for their proposed $34.6 billion merger.
Antitrust experts said Monday the deal could face resistance
from regulators because it would leave the industry highly
concentrated between two large firms: the merged company and
Schlumberger Ltd.
"This looks like a 3-to-2 merger. And 3-to-2 mergers are going
to be tough to get through anywhere," said Steven Cernak of the law
firm Schiff Hardin.
Mr. Cernak said the deal faces an uphill battle. But he credited
the companies with following the appropriate playbook by
emphasizing large cost savings and complementary product lines. For
a deal such as this to obtain antitrust approval, "these are the
ways you do it," he said.
Halliburton and Baker Hughes have multiple overlapping business
lines where they compete for customers, including hydraulic
fracturing of oil and gas wells and computer-controlled underground
horizontal drilling. They also drill in many of the same regions,
from U.S. shale-oil fields in Texas and North Dakota to the deep
waters off the coast of Brazil.
But Baker Hughes has significantly more market share in
technical work where Halliburton lags behind, such as the
artificial lift business of wringing more oil out of older wells,
according to UBS Investment Bank.
Baker Hughes also has a stronger presence in major oil-producing
countries including Canada and Russia, which should help
Halliburton forge inroads there, according to Bill Herbert,
managing director of Simmons & Co. International, an energy
investment bank.
The companies said the deal would give them a better depth and
breadth of services, while generating annual cost synergies of
nearly $2 billion. To address possible antitrust concerns,
Halliburton agreed to divest businesses that generate revenues of
up to $7.5 billion. The company will pay a $3.5 billion fee if the
deal fails to obtain the required antitrust clearances.
"We clearly would not have done this deal if we didn't believe
it was achievable from a regulatory standpoint," Dave Lesar,
chairman and chief executive of Halliburton, said Monday. "We are
absolutely confident that we're going to get this thing done."
Halliburton doesn't expect any sales required by regulators to
diminish the benefits of a merger, Mark McCollum, Halliburton's
chief financial officer, said.
The Halliburton-Baker Hughes deal appears headed for review by
the Justice Department, not the Federal Trade Commission. Both
agencies review mergers for possible antitrust concerns. Mr. Lesar
said the company would start meeting with the department on
Monday.
The companies' legal teams include veterans who understand how
Obama administration officials have approached merger reviews.
Among the lawyers advising Baker Hughes is Molly Boast of
WilmerHale, who served as a high-ranking Justice Department
antitrust enforcer earlier in the Obama administration.
Diana Moss of the American Antitrust Institute, a group that
favors vigorous antitrust enforcement, said the companies have
several notable overlapping businesses including the sale of drill
bits, services to measure underground conditions during the
drilling process and well-cementing and completion services that
make wells ready for use.
Ms. Moss said if the deal goes through, the merged firm and
Schlumberger combined could have 70% to 90% of the market in some
service areas. "We'll have several product lines that could be
duopolized," she said.
Fiona Schaeffer of Milbank, Tweed, Hadley & McCloy said the
Justice Department will want input from the companies' customers,
whose views "will be critical in determining whether this deal gets
done or not."
Another potential key issue could be whether antitrust enforcers
believe that buyers for any divested assets will adequately replace
competition lost by the merger, said Jeffrey Jacobovitz of Arnall
Golden Gregory.
Given the companies' presence in international markets,
including in locations such as Brazil and Canada, they likely will
also need to obtain antitrust clearance in international
jurisdictions. That process could play an important role in the
deal's fate. Several countries around the globe have stepped up
their merger review regimes in the last decade.
The companies on Monday didn't offer details on which
international jurisdictions will need to review the deal.
In addition to the three main industry players, there are scores
of smaller outfits that do oil-field services work.
The number four company in this field, Weatherford International
Ltd., lags behind its larger competitors and has struggled in
recent years with tax accounting errors and violations of the
Foreign Corrupt Practices Act.
Other companies are highly specialized in one area of oil-field
services. Noble Corp., for instance, is a major driller in offshore
waters, and privately-held FTS International is a fracking company
that is active in every major U.S. shale formation and recently
entered a joint venture with state-controlled Sinopec to help pump
oil from onshore fields in China.
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